What is an extraordinary redemption?
Concept and definition
Ordinary repayments are made in accordance with the repayment schedule agreed for the loan. For this purpose, a regular installment payment is agreed within the framework of a certain term. Extraordinary redemption refers to redemption payments made via the agreed redemption schedule.
Borrowing and special arrangements
When a loan is taken out, the general conditions are communicated in accordance with the terms of the loan agreement. The time and rate definitions are also included. The instalments will gradually pay off the loan. Changes in timing occur when no installments are paid, when installment payments are increased or decreased, or when the entire loan is suddenly redeemed with one payment. An extraordinary repayment can lead to an overall repayment of the loan, so that the contract is terminated before the actual due date. With a complete redemption, the borrower can ultimately free himself from considerable costs. Banks earn money from these costs, which are incurred over time with proper redemption.
In order to protect themselves against a loss of business, banks often agree on a prepayment penalty if the loan is to be paid prematurely by complete redemption. Occasionally even maximum payment limits are agreed for a special repayment. These regulations make it easier for banks to make better forecasts. For these reasons, extraordinary repayments are often referred to as unscheduled repayments because they exceed the agreed repayment amounts. If the total liability is repaid with the extraordinary repayment, then this payment is also called credit repayment.
Repayment rules depend on the credit type
Consumer credit agreements, for example, have different credit rules from real estate credit agreements. Thus an unscheduled repayment of consumer credit agreements is usually always possible. Here, however, the bank usually makes compensation payments that are intended to secure the bank’s loss of business.
In the case of real estate loans, extraordinary repayment is possible if no fixed-interest period has been agreed. For unscheduled repayments, there are usually special agreements in the loan agreement that stipulate a certain amount in a fixed period. After an unscheduled repayment, the installment can be reduced or the term can be shortened. A free full repayment is advantageous if the interest rate for a new loan has fallen and the borrower is better off by taking out a new loan.
bottom line
If there is an unexpected increase in money, for example as a result of an unexpected bonus payment, an extraordinary repayment of a loan with an exemption can be very useful. It provides the borrower with the financial air to initiate new planning. If the interest rates for borrowing have fallen comparatively, the borrower can take out a new loan at considerably better conditions and save money. Ultimately, the possibility of a complete repayment of the loan depends on the concluded agreement with its rules.
Compensation payments to the bank must also be taken into account. If the prepayment penalties for a complete loan repayment are very high, then it is mathematically possible that a complete loan repayment with an extraordinary repayment is not worthwhile. In this case, an unscheduled repayment may be advisable, which leads to a shortening of the term of the loan or a reduction in instalments. All options should be calculated before a payment is made. If the extraordinary redemption is not worthwhile, then it may be more sensible to invest the money in a better to invest your money. Costs and compensation should not cancel out the unexpected increase in money.
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