Let's see how this works in an example:
You buy a house or a car, or you decide to pay for your summer holiday with a bank loan. Once the loan has been approved, you can repay the money in instalments under the conditions in the bank's offer, such as the term and interest rates. When you start to pay off the debt, either in full or in instalments, you will be repaying the principal.
The example above is for an instalment plan. Early repayment occurs when we decide to repay some or all of the debt before it is due. If you have a loan, you can check the monthly instalments and the interest rate in the repayment plan, as long as the loan has one of these.
There are two ways of repaying a loan or credit in advance:
- Through partial repayment
Paying off part of the loan through a single payment, which will reduce the size of each instalment. Alternatively, you can also keep the size of the instalments the same and reduce the repayment period.
- Full repayment
Paying all of the outstanding instalments on the loan or credit before the end of the agreed term.
Will I be charged a fee for repaying my loan in advance or making early repayments?
Yes. Your financial institution may charge you a fee for making a loan payment or repaying it in advance. It is very important to understand the loan's terms and conditions and the penalty this operation may entail before making the repayment. This usually involves a percentage of the amount repaid in advance, to compensate the bank for loss of the future interest it would have received.