Special prepayment on loans
The option to make a special prepayment on loans has become standard for many types of credit and is therefore often included in contracts. If the possibility of a special prepayment is not explicitly stated in the loan agreement from the outset, the lending institution should be informed before the contract is concluded. Nevertheless, there are still loan contracts in which the option for special prepayment is regularly not provided for in the general terms and conditions. For a borrower, however, the option of special prepayment is almost always associated with advantages. Foremost is, of course, the possibility of using a special prepayment to repay partial amounts or even the full loan amount, thereby terminating the contract early and being released from all resulting financial burdens. Special prepayment options can be found at public-law credit institutions as well as at private banks or other lending institutions on the internet. The type, amount and other repayment options in the form of a special prepayment regularly have a decisive effect on the effective annual interest rate of a loan agreement. If it is not a public-law credit institution, there are no rigid specifications regarding the design of a special prepayment option in a loan agreement. This has the decisive advantage for a borrower that individual possibilities and solutions for special prepayment during the loan term can be agreed in consultation with the financial institution. This applies both to conventional consumer loans and, for example, to mortgages, where an agreed option for special prepayment can be particularly advantageous. Even if the option of special prepayment was not initially agreed in a loan agreement, many lending institutions grant their borrowers this option retrospectively. So if partial amounts are available for a special prepayment but the contract says nothing about it, one should still speak to the bank, because the corresponding special prepayment clause can often be added even after a contract has been concluded.
Weigh the benefits of special prepayment before signing a contract
Particular attention should be paid to the topic of special prepayment in the case of mortgage financing. It is important to weigh several advantages and disadvantages against each other to protect oneself effectively from contractual mistakes in advance. Most lending institutions even have designated specialists for the topic of special prepayment who can provide detailed information before a contract is concluded. For something to be considered a special prepayment, various conditions must be met. Special prepayment specifically refers to an early and unplanned payment during the term of a loan agreement. This means that the option of special prepayment is always optional, but never obligatory. Even if the option for special prepayment is expressly agreed in the contract, a borrower is not obliged to make use of it, but may do so in accordance with the contractual conditions if it becomes relevant during the loan term. The borrower therefore has the right to special prepayment under the loan agreement, but not the obligation. Borrowers also regularly have the option of early special prepayment with building society loans (Bauspardarlehen). Special prepayments reduce interest and each type of special prepayment releases the borrower a little more from their contractual obligations. It is not common practice for an entire contract to be fully paid off solely by the right to special prepayment. Rather, the possible special payments are usually contractually limited in amount. If a borrower wants special prepayments in unlimited amounts, this should definitely be mentioned before the contract is signed. Early repayment of a loan only makes sense if it is already foreseeable before signing the contract that the corresponding funds for complete repayment of a loan will be available during the contract term.
The option of special prepayment using the example of mortgage financing
In mortgage financing, certain limits have become established in the lending industry regarding options for special prepayment. For example, an annual special payment in mortgage financing can amount to a maximum of between 5 and 10 percent of the total loan amount. Within the fixed-interest periods of a mortgage, special prepayments generally must not exceed 25 percent of the loan amount. Whether for consumer loans, installment loans or mortgage financing, the aim of the option for special prepayment is always to reduce monthly burdens or to shorten the repayment period. Looking at practice over the years, borrowers make surprisingly little use of the option of special prepayment. Lack of financial means certainly plays a role, as does the contractual design of the lenders. When a borrower is granted the right to special prepayment, this is usually associated with a slightly higher interest rate. Depending on the lending institution, the interest rate may rise by about 0.1 percent due to the option of special prepayment. At first glance this does not seem like much, but with high loan amounts or many years of loan term, many thousands of euros in interest payments can add up. It would therefore be ideal for the borrower to arrange special prepayment options contractually without the interest rate increasing as a result. If the interest rate increases by more than 0.1 percent because of the granted option for special prepayment, the additional costs can hardly be offset by special payments. With an otherwise good and low interest rate, one might then possibly refrain from the option of additional special prepayment. In any case, all offers must be compared with regard to the options for special prepayment on loans before signing a contract.
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