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It is common to have to repay his loan before the end of the initially planned duration: sale of the house, injection of surplus savings… The borrower will thus proceed to a total or partial early repayment of his credit.
What is the prepayment of a loan? How do you go about making one? The editorial staff of Pricebank.fr gives you all the information to find out more about this provision which is very much regulated by law, in particular by article L312-34 of the consumer code.
What is a prepayment? Definition
An early repayment is the fact of making one or more installments to settle all or part of the sums borrowed from a credit institution under a loan. An early repayment total corresponds to the fact of paying all of the outstanding capital.
Early repayment is considered partiel when the amounts paid cover only part of the outstanding capital. This last case often happens during an exceptional cash flow for the borrower. This is possible at any time during the term of a loan, but this device nevertheless has well-defined conditions.
Attention : A loan agreement may prohibit early repayment if the amount is less than or equal to 10% of the outstanding capital unless it corresponds to the balance thereof.
What are the fees and conditions for early repayment?
If the banks cannot oppose a request for prepayment, charges are often applied by them for the interest they will not receive because of the premature end of the loan. These fees, also called “Early Redemption Indemnities” (IRA), must however be indicated in the loan agreement in order to be required from the borrower. These costs are completely negotiable before the signature of your loan offer or at the time of carrying out the operation.
A specific clause in the loan contract may indicate that the penalties are no longer applied either after a certain period (8, 10, or 15 years for example) and/or excluding a repurchase of the credit by a other banking institution.
Also remember, if you have several credits, to clearly specify on which credit your prepayment should be allocated.
Good to know : For loans concluded after June 1999, you have no penalties if your request is due to:
- A professional transfer
- A dismissal
- A death of one of the borrowers
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What rules apply to consumer credit?
Article L312-34 of the consumer code authorizes the borrower to prepay, partially or totally, his current loan. However, with the Lagarde law, penalties can be applied to a depreciable consumer loan when the total amount reimbursed exceeds 10,000 euros per 12-month period.
Before making your refund, ask your bank to find out if penalties will apply. If so, nothing prevents you from negotiating them!
Another development since this same law, the maximum amount of consumer credit that must comply with these rules for the protection of borrowers, goes from 21,500 to 75,000 euros!
What are the penalties for early repayment of a home loan?
This is article L313-47 and R313-25 of the consumer code which applies this time for your home loan(s). The penalties requested correspond to the least expensive solution for the borrower between:
- 6 months interest deadlines at average rate of the loan.
- 3% of the capital remaining due.
A noter : if your loan is a loan to adjustable ratethe average rate corresponds to the average of the rates charged throughout the term of the loan up to the date of application. For example: initially your credit had a rate of 2% which lasted 2 years, then the rate was revised to 4% for two years. The average rate is therefore: (2+2+4+4)/4 = 3%. The average rate is therefore 3%.
Example of a prepayment benefit (IRA) calculation
Let’s rely on a 25-year loan of €200,000 with an interest rate of 2% taken out in 2011. The monthly payment excluding insurance is €848. In 2017, you decide to prepay your loan when its outstanding capital is €160,686.
| Possible options | As part of a full refund | As part of a partial reimbursement of €80,000 |
|---|---|---|
| That is 6 months of interest: |
160.686 x 2% / 12 x 6 = 1.608,86 € |
80.000 x 2% /12 x 6 = 800 € |
| Or 3% of the capital remaining due : |
160.686 x 3% = 4.820,58 € |
160.686 x 3% = 4.820,58 € |
| Penalties to pay | 1.608,86 € | 800€ |
The law regulates home loans but these indemnities are not an obligation for banks. This is just the maximum authorized and set by the legislator. To check your conditions, take your loan offer to find out about the repayment terms.
Standard IRAs are mentioned in your terms and conditions. If, on the other hand, you negotiated specific advantages when setting up the loan, it will be within particular conditions of your loan offer.
For the others, nothing is lost and it remains quite possible to ask the bank for a commercial gesture on these famous IRAs (prepayment allowances).
The choice and impact of a partial prepayment
Then, when you request a partial repayment of a mortgage, two solutions are available to you:
If you are looking to optimize the cost of your credit, ask to reduce your loan term and therefore keep your current deadlines: Your credit will cost you less!
Taking into account and effective date of the partial refund
Once the amount of the penalties is known, it is important to pay particular attention to the date on which the refund will be made. Indeed, our advice will be to ask your bank for it to take effect on the usual day of payment of your due date.
You will thus avoid having to pay so-called interim interest. Indeed, your interest is calculated on a very precise frequency and when it is modified, it leads to interim interest which is calculated on a pro rata basis between the usual due date and the effective date of the partial repayment.
For example : you usually pay your loan due date on the 5th of the month. You decide to repay the €80,000 during the month of April. You are therefore deducted on April 5 from your usual monthly payment, which modifies your outstanding capital and it is now €159,838. Your prepayment deadline is April 15. You will then have interim interest calculated over the period from April 6 to 15 calculated on a capital of €159,838 then over the period from April 16 to May 5 calculated on a capital of €79,838. Most often, this interest is deducted from the next due date, ie May 5.
If you have the money available in your current account, make sure that the credit institution makes the partial or total prepayment as soon as possible. Finally, be aware that if you repay to finance a new real estate project, Pricebank offers you to apply for financing online without obligation on your part.
Pricebank hopes that these explanations have given you a better understanding of loan prepayment. For any other questions, we remain at your disposal.
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