Early Redemption Penalties

Most types of loans, secured, unsecured as well as mortgages will have early redemption penalties written into the terms and conditions of the loan agreement. Credit cards and bank overdrafts don’t have such penalties however companies may charge you for spending more than the agreed amount by charging you a fee due to overspending.

What does the term early Redemption Penalty mean?

Early redemption penalty literally means that you as a borrower will incur a penalty if you are to pay the loan off early. The penalty payable is in the form of cash which you will be required to pay back to the lender as a result of you breaking the loan term agreement.

When might this Affect me?

Paying off your loan early may not even cross your mind when originally taking it out. The reality of the matter is that you never know when your personal situation might change. You might earn some unexpected bonus at work or get a promotion which means that you are left with more disposable income at the end of the month so as result you are able to save more.

Whatever the reason might be, you could be in a position where you are considering paying off your loan early. What you might want to consider if you are in such a predicament, is to look at in monetary terms how much you will have to pay the lender if you are to pay the loan early. What you might find is that you are financially better off continuing to pay the loan on a monthly basis as opposed to paying off the remainder. This is due to the penalty charge amounting to more than what you have left to pay back on your loan.

Why do Lender’s charge for early Payment?
It is quite simple really; lenders make money from borrowers by charging interest on the loan. If this was not the case they would not make any money. If you were to pay off your loan early then the loan company would loose out on the interest charges. So in order to avoid getting into this situation they include an early redemption penalty into the terms of the loan agreement as insurance in case you decide to pay off the loan early.

What can I do to avoid getting into this Situation?

The fact of the matter when it comes to avoiding this type of penalty is to do your homework. When taking out your loan agreement, be sure to read the terms and conditions very carefully. Always ensure to get a written confirmation of this. There will be things written in the small print that could catch you out if you are not aware they are there. By doing your research and being aware of what is written, you are more likely to avoid any situation where you might incur any unexpected charges.

If you are the type of person that may require some flexibility with the loan, then shop around to find one suitable to your needs before committing. There are various types of loans out there so compare before making a hasty decision.

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