what is an early redemption charge when taking a loan out.?

Question

Im comparing loans, but not sure what this means, is it a good thing if the bank charges it or a bad thing.

Answer 1

Sounds like a pre-payment penalty that they don't want to call a "penalty".

Read the terms of that very carefully. A penalty of 2% of the principal if a $250,000 loan is paid off in less than five years means you have to pay $5,000 more than the balance to get it cleared.

Answer 2

You can take out a mortgage over as long or as short a term as you want. The lender will not let you go so short that you cannot afford the monthly payments, or so long that there is no realistic prospect of it ever being paid back. 25 years is the "standard" but anything from 10 to 40 is not uncommon. There is never a *penalty* clause for repaying the loan early. Penalty payments are not enforceable in contracts. Some mortgage deals have early repayment charges. You usually get these if you have a discounted period. So if you have a low interest rate for 2 years you also have to pay an extra charge if you pay off the loan in that 2 year period. If you know you will be repaying the loan in a year or so you can avoid these deals. Your best best will probably be to go for an interest only mortgage. You will repay the interest each month and then you will repay the entire loan when you sell.

Answer 3

Recent changes to consumer credit legislation means that banks must tell you how much you'd have to pay if you repay your loan early.

If you think that's likely to happen then you should compare the early redemption charges on each of the offers you get as well as the interest rate.

Your loan offers should give you an illustration of how much you'd have to pay if you were to repay the loan at various stages during the term, so it should be relatively easy to compare the actual cost.

If, on the other hand, you are relatively certain you will take the full term of the loan to repay it, you may want to concentrate on the interest rate alone.

Answer 4

It is a bad thing! I found this useful information.

May 2005 saw the demise of the infamous 'Rule of 78'. And a jolly good job too. It was a most iniquitous method used by lenders to calculate the cost of redemption penalties for loans and payment protection policies.

Up to that time, the interest on loans or insurance premiums were usually 'front-loaded' and the way it worked was very similar to a repayment mortgage. In the early days of a loan, most of your monthly payments were used to pay the interest and insurance premiums rather than the loan itself. So, if you redeemed it early, you often found that you owed nearly as much as you did when you first took it out.

However, since May 2005, lenders have only been allowed to charge a month's interest towards early settlement administrative costs. They are allowed to defer the settlement date by 28 days but effectively, it means that, at most, they can only charge two months' interest if you decide to pay off your loan before the end of the agreed term.

Unfortunately, loans taken out before May 2005 aren't subject to the new calculation methods until 31st May 2007, and people with old loans lasting for more than ten years will have to wait until 2010.

Nevertheless, the reduced costs for repaying loans taken out since May 2005 do allow borrowers to save costs by switching to a cheaper loan elsewhere without being overly penalised for doing so.

Answer 5

This is when banks charge you a certain percentage for paying your loan off too early. Always ask the bank if there is an early redemption charge (or you can call it and early repayment fee). Weigh up whether you will be able to pay the loan off early, if not then you can choose from more lenders but if are considering paying early then try to choose a provider who won't penalise you.

Answer 6

It is an absolute rip-off. What it is: a penalty charge for paying off the loan early. I would not even consider such a loan. Most banks will drop this provision if you ask them to. If they won't go some where else. Paying off a loan early is a good thing, why should you get screwed for managing your finances well?

Answer 7

It is a way that the lender can make sure they get some benefit from lending you the money - if you borrow a sum and agree to pay it back over, say, 5 years, they will earn interest for that time. If you pay it back only 2 months after borrowing it, they will have lent you the money and had all the admin costs for very little. Seems fair enough to me that they should protect their business, because after all, they only lend to people who are unable to manage their finances well enough not to have to borrow!

Answer 8

"A charge applied to repay a mortgage within a specified period, normally shown as a number of month's payments or %."