Canceling a loan – you have to consider that!
For a borrower, taking out a loan means a well-considered long-term commitment to a credit company. However, sometimes things do not go as planned, and there are reasons in favor of canceling the loan. You get money unexpectedly, another credit company offered a significantly lower interest rate, or the financed property had to be sold.
Ordinary termination of a loan
If the contractual interest rate fixation of the loan has ended without full repayment, you can cancel the loan, provided that no new interest agreements have been made.
If the interest rate on a loan is variable, the loan can be canceled at any time, but with a three-month notice period. Long-term loans with a fixed interest rate and a term of more than 10 years can be terminated after 10 years and with a notice period of 6 months, even if the loan contract was actually set at 15 or 20 years.
Exceptional (immediate) termination of a real estate loan
Real estate loans that are secured by mortgages and are subject to an interest rate fixation of up to 10 years cannot usually be terminated before the end of the binding period. A cancellation of the loan in this case is nevertheless possible if there are extraordinary reasons. This includes the need or the need to use the loaned object otherwise. For example, there may have been a need to sell the property due to illness or divorce.
Even if there is a legitimate reason for the extraordinary termination, notice periods must be observed. For example, the loan must have been received at least six months ago and a notice period of three months must be observed. In the event of such an extraordinary termination, prepayment penalty is due, which the lender receives from the customer.
How much can the prepayment penalty be?
The amount of the prepayment penalty depends on the loss of interest that the credit company has as a result of early termination. The bank may also charge a reasonable processing fee.
A very low prepayment penalty of a few hundred euros is only to be expected if the financing was carried out at a significantly lower interest rate than the current market situation. In this case, canceling the loan would be good business for the bank, as it can invest the money that flows back more lucratively.
However, if the loan was made at a significantly higher interest rate than the current market situation, the prepayment penalty will also be significantly higher. Exactly how much this compensation is depends on the amount of the amount already repaid, as well as the term that still remains for fixed interest rates.
The lender terminates the loan contract without notice
This can only be done if the value of the security used for the loan has deteriorated significantly, thereby jeopardizing the claim for reimbursement. Evidence of this is foreclosures and late repayments.
Basically, anyone who has the option of repaying current loans should do so and save the money on the interest. However, if a proper termination is not possible, you should carefully consider whether the payment of a high prepayment penalty justifies the repayment of the loan contract.