For many years, the so-called “special repayment right” has become one of the most popular options for loan agreements. Special repayments provide flexibility and allow the borrower to selectively influence the repayment of the loan, depending on changes in interest rates and financial circumstances. But which aspects should be considered in connection with the special repayment right? When are special repayments and when not worthwhile? The following article deals with the topic “Credit with special repayment right” and deals with the mentioned questions.
The term “special repayment” means unscheduled payments by the borrower that are made independently of the monthly repayment installment specified in the loan agreement. The special repayments affect the repayment process and ensure, for example, that the term of a loan can be specifically shortened. The borrower receives in the credit agreement a so-called “special repayment right”, which specifies how and in what manner special repayments may be made. In this context, there are different requirements from one bank to another, which can specify, for example, that special repayments are accepted only on fixed dates or above a certain amount (eg EUR 1,000.00). Technically, a special repayment is a normal transfer, which is initiated by the borrower on the respective loan or loan account.
Due to numerous requirements of consumer protection, the granting of special repayment possibilities in the banking industry has become a “good sound”. Almost every branch or direct bank therefore offers its customers to conclude a loan agreement with integrated special repayment right. However, there are major differences in terms of the costs incurred or the limits for special repayments. Basically, however, a distinction must first be made whether it is a private or consumer loan or a real estate loan. In the area of personal loans, special repayments are usually always possible in unlimited amounts (the same applies, for example, to traditional home savings loans, which are taken out by a building society). However, in the case of mortgage loans, the world looks completely different, so that as a borrower you can only make special repayments here if the special repayment right required for this purpose is also mentioned in the loan agreement. Experience has shown that unscheduled repayment options ranging from 5.00 to 10.00% of the original loan amount can usually be negotiated free of charge. If, however, a borrower desires an unrestricted special repayment right in the case of a real estate loan so that he can repay the loan at any time or even repay the loan, high costs can be incurred for this request.
Special repayments can be very beneficial to the borrower depending on the evolution of interest rates. In the current period of low interest rates, special repayments on older loans, which still run with a loan interest rate of 4.00%, 5.00% or higher, are very worthwhile because the faster repayment can save considerably more interest costs than one could save in the same period Interest on a savings account or daily money account could earn. In addition, borrowers can significantly reduce the original repayment term through special repayments. This is particularly interesting if the borrower is faster debt-free and want to call a “no-load” property his own. Ultimately, one can save not only a lot of money (interest savings) and a lot of time (term reduction) by special repayments – you can also ensure that “emotional goals” such as “debt free up to the age of 60” can be achieved.
As far as the disadvantages of special repayments are concerned, borrowers need only be aware of two things. Funds that are deposited as special repayment on a credit account are bound and can not be “retrieved” again. The execution of a special repayment is therefore always associated with the commitment of liquidity, which is why you should check as a borrower, whether even after the implementation of a special repayment sufficient financial reserves for unplanned expenses or the like are available. In addition, costs may arise in granting the special right of repayment, which is why one should always take care in the design of the loan agreement that a special repayment right is chosen in a suitable and realistic amount. Example: With a financing amount of 300,000.00 Euro, borrowers often receive free special redemption options in the range of 5.00% (15,000.00 Euro annually) and 10.00% (30,000.00 Euro) annually. As a customer, one should consider carefully whether the free special repayment possibilities are not sufficient before talking to the bank about a fee-based extension of the special repayment right. For higher unscheduled options, banks may either charge a one-time processing fee, the so-called “option premium”, or there may be an interest charge on the initial credit condition (eg + 0.10% or + 0.20% – depending on the amount of the required unscheduled repayments).
In connection with the subject of special repayments, there are many things that you can do right as a borrower. Depending on the level of interest rates, it is very lucrative to make annual special repayments on a relatively high interest rate loan (especially if there is a large difference between the loan rate set in the loan agreement and the current level of prepaid interest – for example, 4.00% loan interest and 0, 10% credit interest on the call money account). However, the capital commitment mentioned above should not be disregarded, so that special repayments should only be made if there are financial resources available that are not needed in the long term. To save costs, you should first ask when signing a loan agreement, which is the highest possible, free special repayment right. In most cases, annual special redemption rights of 5.00 to 10.00% of the original loan amount are absolutely sufficient. As a borrower, in most cases, you also want to drive a nice car, go on holiday regularly, and have a good standard of living. “Extremely” high special repayment rights only make sense in practice if extraordinary and high cash inflows are to be expected within the interest rate commitment, for example due to the maturity of a life insurance policy or an expected inheritance.
Conclusion: A loan with special repayment right is very advantageous for the borrower to have the highest possible flexibility. Special repayments enable borrowers to save on interest costs and shorten the repayment term. For consumer protection reasons, loans with special repayment options are now offered by almost all banks. There are differences in terms of the maximum amount or the costs incurred. A special repayment right of 5.00 to 10.00% of the original loan amount can be agreed free of charge in most cases.