Paying off a personal loan in full ahead of the payment term deadline may ease your financial burden. You no longer have to deal with high-interest rates. You’ll say goodbye to dreaded monthly payments. Most importantly, you’ll now live a life debt-free.
But while you think you’ll save more money from paying early, this may not be the case when you sign up for a personal loan with a prepayment penalty. Lenders may charge you more than you agreed, adding more expense on your part on top of your loan balance.
The key to avoiding this hefty charge is to look for lenders that won’t require such a fee. There are other ways to get funding without dealing with this added expense.
This article will help you get away with an existing prepayment penalty personal loan and tell you what to consider to avoid getting one.
What Is a Personal Loan Prepayment Penalty?
A personal loan prepayment penalty is a charge from the lender if you plan to pay off your loan before its term ends.
Lenders make money from personal loans through the interest they charge for a certain length of time. If you pay the loan in full, they will tend to lose their projected income from the interest payments you should have made until the period ends.
To compensate for their financial loss, a lender charges a prepayment penalty on a personal loan on top of your remaining balance before you completely erase your debt. It enables them to still earn even when you plan to cut ties with them by paying off everything.
Are prepayment penalties always legal?
The Consumer Financial Protection Bureau imposes limitations on prepayment penalties. This charge has also been banned in some states, no matter what type of loan you have.
However, note that some lenders work under state laws. Some banks also operate within the grounds of federal law, which also have different sets of regulations when it comes to loans like this.
Check with your lender for clarification if you want to determine the prepayment penalty.
Book an appointment with us to learn more about our no prepayment penalty personal loan.
Can You Pay off a Loan Early?
Yes, paying all your loan balances before the agreed term is possible. However, you need to consider the penalties that are added on top of your remaining loan.
Plan your loan payments carefully and consider the possible fees your bank or lender may charge you before you entirely pay off your loan.
Why do lenders charge a prepayment penalty?
The business of lending revolves around putting interest on borrowed money.
Lenders offer loans with interest to earn. The longer the payment period, the more interest the loan will have.
Ideally, if you pay early, you no longer have to pay for the interest. However, this is a loss of potential income for lenders who will lose the payments for the remaining duration of your loan.
With this, lenders levy a penalty for borrowers who pay ahead of the agreed term. This is an assurance on their side that they will still earn from you even when you forego paying until the term’s end.
How much does a prepayment penalty cost?
Your lender determines a prepayment penalty cost depending on your loan type, the period left on your term, the remaining balance, and their internal regulations.
The charge can be calculated in the following ways:
Percentage of balance. Your lender determines a specific rate for your remaining personal loan balance.
Remaining interest. The sum of all interests for the remainder of your loan.
Flat fee: A fixed charge regardless of your remaining balance and the term period of the loan.
How Do You Know If Your Personal Loan Has A Prepayment Penalty?
A prepayment penalty is not a mandatory regulation for all banks and lending institutions. Some lenders who offer personal loans do not charge for early payment.
On the other hand, funding companies impose a fee that should be stated and discussed before you sign the personal loan agreement.
Before you apply for a personal loan, ask the loan provider if there is an added penalty for early payment. Shop around for loan deals and ask lenders about prepayment penalties to give you an idea of the potential charge.
Loans That Might Have Prepayment Penalties
Aside from personal loans, you may also spot prepayment penalties in other types of loans. Note that not all loans have prepayment penalties.
A typical loan type with a prepayment penalty is a mortgage. There is no added penalty if you add small payments to your loan principal.
But if you pay off the entire balance early, your lender can have the freedom to charge you, which you may have agreed on when you signed the closing documents.
Lenders calculate the penalty by determining the percentage of the principal balance or the lump sum.
Other loans that have early payment charges include car loans and home equity lines of credit, or mostly known as HELOCs.
Always discuss with your loan provider about this penalty before signing the agreement so you will be reassured if the time comes that you want to pay off your debt ahead of the term.
You can get a loan with Alliance One Funding without the fear of facing a hefty penalty when you decide to pay it off early.
Aside from the absence of a prepayment penalty, you are also assured that there will be no hidden charges on your loan until the end of the term. Schedule a call with our representative today to know more.
How Can You Avoid a Prepayment Penalty On A Personal Loan?
Are you planning to get a personal loan soon? Consider these tips if you want to avoid shelling out money for an additional charge, such as a prepayment penalty.
Research and talk to different lenders before applying for a loan. Aside from discussing how long you can pay off a personal loan, low-interest rates and flexible monthly payments, you also bring prepayment penalties into the conversation. Choose a loan provider that does not require a prepayment penalty.
Join a credit union
Instead of looking for a lender who charges a prepayment penalty, try joining a credit union where you can take a personal loan without an early repayment penalty.
Consider a secured loan
A personal loan is categorized as an unsecured loan with a stricter set of regulations, including a prepayment penalty.
With a secured loan that requires collateral, there is a higher chance that you can avoid a hefty charge.
Raise your credit score
Make use of your good credit standing by negotiating the fees. Pay off your credit card debts or ask your credit card issuer to raise your credit limit to achieve a high credit score. Lenders tend to be open to negotiating for borrowers with a high credit score.
How are Prepayment Penalties Calculated?
Typically, the prepayment penalty cost depends on your loan type, the balance, and how your lender comes up with a fine.
Lending companies follow different sets of guidelines to calculate a penalty for early loan payments.
If your existing loan has a prepayment penalty, learn how your lender determines the fee to weigh in on the options that are more advantageous on your part.
If your loan has a prepayment charge, figuring out precisely what the fee will be can help you come up with a decision. You can find out if paying the fine will outweigh the advantages of paying off your loan early.
Here are three different ways the prepayment penalty fee is calculated:
Your lender can base the penalty on the interest of the loan that you should have paid throughout the entire loan term.
For example, if you are only two years into a 5-year loan contract and you’d like to pay off the remaining loan, you need to pay for all the interest for the remaining two years.
Percentage of balance
The charge may come from a percentage of the remaining loan amount. The rate typically varies from one lender to another. The funding company determines the specific percentage to impose based on its own loan guidelines.
A flat fee is a fixed rate that is charged regardless of the duration of your remaining loan,
The fee remains the same whether you want to pay in full after only a few months from the start of your loan contract or you are a couple of months away from the end of the loan term,
If you are considering a personal loan, read the fine print thoroughly and make sure you understand every detail stated.
You can also request a quotation from the lender for a loan with a prepayment penalty so you can weigh the possible costs you may have to spend should you push through.
Alliance One Funding provides personal loans without prepayment penalties, so you need not worry about incurring charges. Talk to us to learn more about our loan services.
How to deal with prepayment penalties on an existing loan
An existing loan with a prepayment penalty is already under a signed agreement. If you plan to pay off your debt early, you need to pay for the penalty as part of your contract.
Before paying off your loan, talk to your lender about the possible penalty and if it will be a massive dent in your savings.
Your lender may also advise you to forego prepayment in order to save money. For some loan providers, the prepayment penalty may be less if you are nearing the end of your loan term.
You can consider this option rather than paying off the loan early, so you don’t have to deal with extra expenses.
Questions to ask your lender about prepayment penalties
When you shop for loans and talk to lenders, be prepared to ask crucial questions to determine how they deal with a prepayment penalty.
These are the inquiries you can bring up during your loan consultation:
How much do you charge a prepayment penalty?
Identify the projected penalty the lender may require for the specific amount you want to loan. You may set up a sample early payment date and ask for a computation for the penalty.
How do you calculate the penalty?
Ask about the prepayment penalty calculation—whether they determine the charge by your balance, the remaining time before the term, or if they allow a fixed rate.
What’s the maximum amount I can be charged if I pay the loan early?
Determine the possible penalty the lender will require on top of your balance. Ensure that the charge is acceptable and won’t hurt your finances.
Are you willing to negotiate the penalty?
Lenders can be flexible with penalties if they have a high credit score. Explore the options they provide and check if you are amenable to their regulations.
If the lender imposes a prepayment penalty, read the clause carefully in the contract. You can have them explain the details before making an informed decision.
Get a personal loan without a prepayment penalty
A personal loan can be a solution to fund any purchase you may need. You can use it to buy a new appliance, pay your tuition fee or medical treatment, or pay off an existing loan such as a credit card.
Applying for a personal loan with us is fast and convenient—we do not demand an application fee and provide free consultation without mandatory commitment.
Repaying your debt is also swift with Alliance One Funding. We provide a flexible payment term that fits your financial capabilities.
Once you have a full payment ready on your hands, you can pay off your entire personal loan without a prepayment penalty.
You are assured that we’ll not get in the way of you having a debt-free life.
Want to get a personal loan with us? Book a free consultation with one of our finance managers to get started.