Special repayments are unscheduled payments to reduce the remaining debt on a loan

Unless otherwise agreed in the contractual terms, additional payments may result in costs for the customer. Nevertheless, it can be worthwhile for borrowers to make special repayments. This article shows when this is the case and what consumers have to consider.

Definition: What is a special repayment?

Definition: What is a special repayment?

With special repayments, borrowers reduce the residual debt of a loan. You have the option of making additional payments to the bank once or regularly, regardless of your installments. These amounts count towards the repayment of the loan, which reduces the remaining debt. This results in a double effect for annuity loans and special repayments:

  • The term of the loan is shortened.
  • The interest burden drops.

In the case of annuity loans, the installments consist of a repayment component and an interest component. Since the monthly installments remain the same over the entire term until the debt is settled, payments are not required due to the special repayment. Thus, the borrowers save the interest portion of the missing installments.

With a classic installment loan, additional payments are not provided as standard. Nevertheless, many lenders offer their customers the opportunity. This option is used by consumers when they receive capital, whether planned or unplanned, for example from insurance, special benefits such as vacation and Christmas bonuses or through an inheritance.

As a rule, special repayments are subject to one of the following conditions:

  • Special repayment right between five and ten percent of the net loan amount per year
  • Maximum annual amount in USD (1,000 USD, 2,000 USD,)
  • Total maximum amount in percent, for example a maximum of 20 percent of the net loan amount during the entire term

Calculate special repayment (with example)

Calculate special repayment (with example)

To be able to calculate the effects of the special repayment, a repayment plan is necessary. Customers receive this when completing their loan. As a rule, no special repayments are taken into account without an express customer request. An example:

  • Loan amount: 10,000 USD
  • Borrowing rate: 5.5 percent
  • Term fixed interest period: 5 years
  • Monthly rate: 129.17 USD
  • Remaining debt after the fixed interest period has expired : USD 4,259.93

In this example it can be seen that customers repay their loan with 5,740.07 USD within five years. The interest expense is 2,009.93 USD. At the end of the term, there is a remaining debt of 4,259.93 USD.

Repayment schedule with special repayment

Customers can find various free computers on the Internet that they can use to create their repayment plan with special repayments. To do this, they enter all credit-relevant data and the desired additional payments. Based on the above example and a free annual repayment of 600 USD, your repayment schedule would now look like this:

  • Loan amount: 10,000 USD
  • Borrowing rate: 5.5 percent
  • Term fixed interest period: 5 years
  • Monthly rate: 129.17 USD
  • Remaining debt after the fixed interest period: 901.85 USD
  • Special repayments of 600.00 USD per year

Evaluation of the repayment plan

Looking at this example to calculate the special repayment, it becomes clear what advantages the additional payments have with an annuity loan. Customers not only reduce their residual debt, they also save high interest costs.

In this case, the free special repayments make sense for the borrower due to the interest savings. If the customers paid a higher amount, there would be no remaining debt after the fixed interest period. It would also be possible for them to pay off their loan earlier. There may be a prepayment penalty.

Make a special repayment

In order to make a special repayment, the borrowers must know the amount of the additional payments that are contractually permissible. Some banks set their customers fixed dates on which the special repayment has to flow. If borrowers miss this date, there is no option to make a free payment for the current year.

Many borrowers wonder about the special repayment, how to transfer it. Unless otherwise noted by the banks, the payment will be transferred to the bank account designated for payment in installments. It is advisable to state the note “special repayment” in the booking note. In addition, the contract number and customer number must not be missing, so that the bank correctly allocates the amount.

Tip: Set up a standing order – By setting up a standing order, customers do not miss any of the deadlines set by the banks and can be sure that their additional payment will be carried out automatically.

When does a special repayment make sense and for whom is it worth it?

When does a special repayment make sense and for whom is it worth it?

Special repayment options are not mandatory for customers. If this option has been stipulated in the contract, the borrowers can make additional payments, but do not have to make use of them. For personal loans, many banks offer this option as a standard in their contracts. If the payments are not associated with additional costs, special repayments make sense for customers who want to pay off their loan as quickly as possible.

Especially with larger amounts of money, borrowers have to take into account the so-called opportunity costs. These are amounts that customers will miss if they do not invest the money in capital investments. If the interest rate on the money market is higher, for example for funds or interest products, it is more worthwhile for consumers to invest the amount at good interest rates.

Tip: Savings with low repayments – Special repayments are profitable, especially for borrowers with a low initial repayment. Due to the high interest component in the first few years, the additional payments reduce their interest burden at the beginning of the term.

Costs and fees for special repayments

Costs and fees for special repayments

The banks make a significant difference in terms of the special repayment options. At some institutions, additional payments for small loans are free of charge, at others fees are payable. Customers who are interested in special repayments should therefore check this option when signing the contract. These fees may apply if borrowers make unscheduled payments:

Calculation fees and interest premiums

With low special repayment amounts of up to five percent of the net loan amount, many lenders do not charge fees. However, if customers want to repay more, they have to expect interest surcharges. As a rule, these are between 0.05 and 0.07 percent.

Caution: In the case of construction financing, the interest mark-up for the special repayment option can be significantly higher and up to 0.25 percentage points. With a financing sum of 200,000 USD and a term of 15 years, the loan costs increase considerably:

The inclusion of a special repayment option, especially with real estate loans, is only economical if the borrowers actually make use of it.

Tip: Take the APR into account – The APR gives information about the total cost of a loan, since it contains all the fees. The effective interest rate also includes the additional amount for special repayments. With finance check’s free loan comparison, consumers can easily compare the effective annual interest rate of many banks with each other in order to find the best offer for themselves.

Special repayments can have a negative impact on the tax

The repayment portion of a loan cannot be deducted from tax. This also applies to special repayments, so they are not taken into account by the tax office. However, the interest expense can be tax deductible if the loan is used to generate permanent income. These prerequisites apply to the self-employed who apply for a business loan or a building loan that is used to finance rental apartments.

Special repayments offer the advantage of lowering the interest burden. However, this property can be a disadvantage for people who claim the loan for tax purposes. Due to the reduced interest expenses, the taxable income and thus your tax burden increases.

Special repayments on car loans

Special repayments on car loans

Special repayments on car loans make sense if customers have deposited their vehicle as security. Due to the earlier repayment of the loan, the vehicle registration passes to them more quickly, making them the rightful owner. Additional payments are also worthwhile if the borrowers want to sell the financed vehicle in the next few years and do not get the bank’s approval.

Special repayments for construction finance

As already mentioned, not every bank offers the special repayment free of charge. Especially with home loans. the option is often associated with higher interest rates. Special repayments that are subject to a fee only make sense if customers are guaranteed to make use of them. This is the case, for example, if they expect a large sum of money in the coming years that they will bring in to finance their home.

Despite the additional fees, it can be worthwhile to pay off the construction loan faster than planned. Depending on the amount of the special repayments, borrowers can shorten their financing period by several years. The interest expenses saved as a result can significantly exceed the additional costs. In this case, it is advisable to have the bank draw up a repayment plan that includes the special payments.

Tip: Use Intrasavings loans – Intrasavings bank building loans offer borrowers several advantages, not least because of the low interest rates. Another positive aspect is that the bank considers free special repayments in most contracts.

Prepayment penalty for special repayments

Prepayment penalty for special repayments

If borrowers repay their loan earlier than planned, the banks may charge a prepayment penalty. This is a colloquial contractual penalty that is intended to cover the refinancing and margin damage of the bank. The amount of the prepayment penalty is regulated by law and depends on the remaining term:

  • a maximum of 1 percent of the remaining debt with a remaining term of more than 12 months
  • maximum 0.5 percent of the remaining debt with less than 12 months remaining term

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