• Credit early repayment calculator

• Full guidelines for early repayment of loans

What is an advance payment?

Advance repayment is the act of the borrower making an advance payment of part or all of the principal of the loan before the maturity of the loan. By way of early repayment, the total interest to be paid could be reduced, thus saving costs. In the case of higher interest rates and longer loan durations, the return on early repayments is particularly significant.

Why consider early repayment?

• Interest savings: This is the most direct benefit of early repayment, which can significantly reduce total interest expenditure.
• Relief of pressure: Early debt repayment, reduced monthly repayment pressure and improved psychological status.
• Improving credit: The credit record of good performance in early repayments facilitates future loan applications.
• Economic benefits: Early repayment may be the safest option if idle funds are available and if there are no better investment channels.
• Flexible planning: Without a fixed repayment period, flexibility may be applied to the funding situation.

Characteristics of the two main repayment modalities

Equivalent principal repayment method: The monthly repayment is the same, with interest being paid primarily in the prior period and the principal being paid progressively in the later period. This approach was initially less stressful and facilitated budget planning. For loans in this manner, the most positive advance repayments are in the prior period.

Equivalent principal repayment method: The principal amount is the same as the monthly repayment, and interest is decreasing monthly, so monthly is set to decline monthly. This approach has been subject to high pressure on early repayments, but has resulted in lower long-term interest expenditure. Loans that have already been repaid in equal amounts of principal would have a less significant effect on the interest rate savings of early repayments.

Two options for early repayment

Shortening of the duration of the loan: The monthly provision is maintained and the loan term is reduced by early repayment. Suitable for borrowers with sufficient cash in hand and who do not need liquidity. This would allow for faster debt repayments under the same months.

Reduction in monthly supply: The duration of the loan is maintained and the amount due is reduced by the amount due in advance. It is appropriate for borrowers who need to improve cash flows and increase funds for monthly activities. This reduces the monthly repayment pressure.

Best timing for early repayment

• Early best: Early repayments of loans are the best effect, as interest is the largest at this time.
• When sufficient funds are available: Advance repayments are considered only if sufficient cost-of-living, contingency and other investments are required.
• When no better investment is made: If there are other investment channels with a higher rate of return than the loan rate, early repayment is not necessary.
• If there is no advance payment of interest: Understanding the terms of the contract and confirming that early repayment would not give rise to a breach of contract.

Matters requiring prior payment

• Defaults policy: Some loan contracts require a certain percentage of default money to be paid in advance and require prior knowledge.
• Tax implications: Interest on housing loans is taxed in certain cases and early repayments may affect these preferences.
• Opportunities costs of investment: Cash in hand may have higher investment opportunities than loan interest rates, and needs to be weighed.
• Liquidity requirements: (c) Ensure that adequate emergency funding and livelihood are maintained after early repayment.

Decision-making framework for early repayments

Step 1: Calculate the interest rate on the loan and the likely return on investment. If the return on investment is significantly higher than the loan rate, the repayment is not made in advance.

Step 2: The emergency funding for living is recognized as sufficient and normally requires three to six months of subsistence.

Step three: All costs of early repayment, including defaults, are known.

Step 4: The calculation of interest savings from early repayments is compared with other investment opportunities.

Step 5: Final decision-making is based on individual risk tolerance and psychological preference.

Common error zones for early repayments

• The low rate of debt-seeking: Overemphasis on early repayments could miss better investment opportunities.
• Neglect of liquidity risk: All funds are used for early repayments, which makes it impossible to respond to contingencies.
• Cost of non-computer: There is no difference between the return on early repayments and other investments.
• Unread contract terms: Insufficient understanding of the costs and limitations of early repayments.