If you are paying back a cash loan, you must know that you can give back the money borrowed from the bank earlier, before the date specified in the loan agreement. The bank cannot block the early repayment of the cash loan. Check what you can gain from this solution and whether it is profitable.
Early repayment of cash loan in 2020 – what is it about?
When signing the loan agreement, the customer undertakes to return the amount of capital borrowed, along with interest charged by the bank and all other fees, within a strictly defined period.
The repayment of a cash loan is divided into principal and interest installments, which contain part of the capital, i.e. the repayment of a part of the relevant debt, and interest calculated at a specific interest rate, as a remuneration for the bank for granting the loan. The bank expects timely repayment of individual monthly installments.
However, it may turn out that the customer wants to pay the cash loan early and is fully entitled to do so. It is worth reading in the contract signed with the bank what conditions the bank will assume for earlier full or partial repayment of the loan. It may turn out that he will charge additional fees for this.
Thanks to this, it compensates for lost interest. Is it, therefore, worthwhile paying back the cash loan early?
According to the interpretation of the Act on consumer credit, the Financial Ombudsman and the President of the Office of Competition and Consumer Protection in the event of early repayment of a consumer loan, the creditor is obliged to reduce and refund all costs of such credit proportionally.
Do all banks allow early repayment of cash loans?
Currently, each bank offers its customers the option of early repayment of cash loans. This is almost standard.
However, the costs of such a decision may be slightly different, so when choosing a cash loan, you should familiarize yourself with the terms of early repayment. In some of them, this solution may be free, which will be extremely beneficial for the borrower.
Legal basis for early repayment of cash loans
The right to repay cash loans early is guaranteed by the Act of May 12, 2011, on consumer credit. In art. 3 indicates what should be understood as a “consumer loan agreement”.
Well, it is a loan agreement in the amount not exceeding USD 255 550 or the equivalent of this amount in a currency other than the Polish currency, which the creditor grants or promises to give it to the consumer in the scope of its activity.
Simply put, a cash loan can be defined as a consumer loan if:
- is given to the consumer,
- it is granted for purposes not related to the conducted business activity,
- its amount does not exceed USD 255 550,
- granted for a fee.
In art. 48 of the same Act, the legislator guaranteed the consumer that he has the right to repay the loan in whole or in part before the date specified in the contract, at any time. Early repayment of a cash loan cannot be made by the bank on whether the consumer will inform the lender in advance of such an intention.
Does early repayment of a cash loan pay off?
In most cases, early repayment of a cash loan is beneficial for the borrower. The advantages of this solution are mainly due to the fact that it no longer has to worry about paying installments and can free itself from the financial commitment, which for many people is not only a financial but also a psychological burden.
However, the early repayment of the loan will not always be profitable. This can sometimes happen in the case of a mortgage, which is taken even for 25-30 years. Cash loans, however, do not entail such fears. Nevertheless, it is always worth checking what the loan agreement is for and whether it is talking about early repayment.
We can see by looking at the numbers that early repayment of a cash loan pays off. Imagine that you take a cash loan for the amount of 20 thousand. USD for a period of 12 months. The loan interest rate is 7% per annum and the installment is fixed.
This means that you have to pay installments of USD 1,732, which means that the amount of interest is about USD 768. Therefore, your total cost of credit will be USD 20,384.
However, if you pay off your loan earlier, e.g. after 4 months, your interest amounts to approximately USD 320. What does this mean for you? Savings of approx. USD 350. The above calculations assume that the bank does not charge a commission for the early repayment of cash loans.