How to properly close a loan ahead of schedule

When is it possible to repay a loan ahead of schedule

Previously, if a borrower closed a loan ahead of schedule, they had to pay a penalty. This sanction was intended to prevent the bank from losing profit in the form of interest for using credit funds. Since 2011, financial organizations have been legally prohibited from penalizing borrowers for early loan repayment.

Now, if a client intends to close a loan ahead of schedule, they must notify the lending organization of their decision in advance. The notice period can be anything, depending on the requirements of the loan agreement. However, it cannot exceed 30 days under any circumstances.

Please note, however, that banks still have the right to refuse a borrower early loan repayment or limit the amount a client can deposit at one time. Therefore, when concluding a loan agreement, be sure to pay attention to this clause.

When it is profitable to repay a loan early

Sometimes funds set aside for early loan closure are better used in another way. For example, placing them in a deposit with a higher interest rate than the one set for your loan. Thus, if the deposit yield is 7.5% per annum and the loan overpayment is 4.7% per annum, the income earned from the saved money will cover the cost of servicing the loan. In the opposite situation, of course, it will be more profitable to make early payments.

We also do not recommend spending money from your emergency fund on early loan repayment, since this money is your safeguard in case of unforeseen situations.

Which is better: reducing the monthly payment or shortening the loan term

With partial early loan repayment, the borrower can choose the option that suits them: shorten the loan term or reduce the monthly payment amount. This is most often not specified in the loan agreement, and therefore the client has the right to decide for themselves how the loan repayment schedule will change. 

Please note that reducing the loan term can be profitable in the following cases:

• if you have been paying off the loan for only a couple of months, and it was issued for several years;

• the amount of your monthly payment does not exceed half of your income;

• loan repayment is made via annuity payments;
• the bank has no fee for early loan repayment.

Methods of early loan repayment

You have two options for early loan repayment: partial and full. In the first case, you can transfer amounts exceeding your monthly payments. In the second case, you can pay off the debt in a single payment and close the loan agreement. Let's discuss this in more detail. 

Partial early repayment

Partial early repayment of a loan allows you to shorten the loan term or reduce the monthly payment amount. Which option is better depends on the borrower's financial situation. If you have a long loan term and a significant monthly payment, we recommend first directing available funds toward reducing your debt burden. Once the payment becomes comfortable for you, you can make additional amounts to shorten the loan term. 

For partial early loan repayment, we recommend making payments on your regular monthly payment date. This will allow you to direct the amount toward paying off the principal of the debt. If you make an early payment on another day, it will first go toward paying off interest, and only then toward paying off the principal.

Full early repayment

If you have a sufficient amount to pay off the remaining loan debt and accrued interest, we recommend fully closing the debt with the bank. To find out the exact amount to pay off the loan, you need to contact a bank representative.

After you pay off the loan, make sure the final payment has reached the bank. Then submit an application to close the account and request a certificate of no outstanding debt. 

How to repay a loan ahead of schedule: step-by-step instructions

When closing a loan early, do not forget about important details. To avoid suddenly remaining a debtor, follow these instructions:

1. Make your current monthly payment — early loan repayment is only possible if there is no overdue debt to the bank.
2. Inform the bank of your intention to close the loan ahead of schedule. To do this, you can write an application or submit it online without visiting the bank, if permitted by the bank's policy. Be sure to take a copy of the application. 
3. Check the exact amount for early loan closure with your manager. 
4. Transfer the specified amount to the credit organization's account using the payment details.
5. Request a certificate of full debt repayment from the bank.

Advantages and disadvantages of early loan repayment

Among the advantages of early loan repayment, we can note:

• the ability to shorten the loan term or reduce the monthly payment and thereby lower the debt burden;
• the ability to return part of the funds spent on purchasing a life and health insurance contract.

The disadvantages of early loan repayment include:

• under the annuity payment scheme, early loan repayment does not make sense if you have paid off at least half of the required amount;
• the need to notify the bank in advance of your intention to make an early payment.

Insurance refund upon early loan repayment

To protect themselves against potential risks, credit organizations require clients to take out life and health insurance policies. If you close a loan early, the insurance company may either automatically cancel the insurance or refuse to do so. In the second case, insurance obligations will remain in effect until an insured event occurs.

Be sure to pay attention to this clause in the contract when taking out life and health insurance. After all, you will not be able to claim a refund if it contradicts the insurance terms.