For the acquisition of movable or immovable property, the UK residents consumer often resorts to financing, since the high cost may make it impossible to purchase in cash. However, if conditions become more favorable, is it worth paying off financing before the deadline?
This is a very common question. First of all, understand that to pay off a loan, you must:
- get to know in depth all the conditions of your debt;
- contact the creditor institution to consult the cash payment amount;
- analyze the interest rates charged;
- know the discounts and rates involved in the early discharge;
- have structured financial planning;
- know the differences between investing and paying off the debt.
For those who have a loan, paying all debt is the dream. If you are planning to renegotiate your debt amount and find new, more advantageous options to get rid of it, we recommend reading this article here.
Now, to put an end to your doubts and help you make the best decision regarding paying off financing in advance, we have prepared this post with all the information. Track and make smart use of your capital. Good reading!
How does financing work?
The financing is a type of credit that helps the consumer to acquire higher value goods, such as real estate and vehicles. The hiring process is very simple:
- the creditor institution bears the value of the purchase of the asset;
- the consumer is responsible for the payment in installments of the total amount, plus interest and special rates;
- each contract is individual, the installments can vary from 10 to 30 years;
- the property becomes legally owned by the client only when he settles all installments;
- if there is default, in addition to charging a fine, the bank can still take back ownership of the property and put it up for sale at an auction.
Is it worth paying off financing before the deadline?
If you have taken out a loan and obtained significant extra money, it is your responsibility to assess whether there are safe conditions to meet this commitment before the deadline.
The psychological relief of ending debt is indescribable, but you need to be aware that this it’s a mathematical question. Analyze the transaction numbers to identify whether this is an advantageous solution for your capital.
Financial education experts point out that paying off financing in advance involves more than interest rates, the number of installments or the amount of installments, you need to consider the economic situation consumer.
If the debtor does not have the financial health up to date, using extra income to get rid of debt may not be the best option. In other words, paying off financing ahead of time can compromise your savings.
How to assess whether it is worth it or not to pay in advance?
First of all you need to consider the investment options for that extra capital. Therefore, you must contact the creditor institution and know all the rules for a cash settlement.
Then, make a comparison of the total effective cost (CET) of financing with interest rates obtained with a parallel investment. If the application fee is lower than the CET, paying off financing in advance is a smart solution, and vice versa.
But it is worth remembering that in this account, you must also consider the costs of the operation, the Reference Rate (TR), the built-in insurance, the rates, the taxes and so on.
In addition, it is necessary to take into account the proposal of the banks. In many situations, paying off financing before the deadline only becomes an advantage if the bank withdraws all interest corresponding to the advance installments, in particular, those with higher rates.
When the discount given by the creditor institution is very low, investing capital in a low risk investment is more interesting for your income. It is necessary to analyze your case very carefully to validate the early discharge.
Is there a fee for early discharge?
Now that you understand that paying off financing before the deadline is not always a good option, let’s explore one more issue that will influence your decision: tariffs.
All financing made before December 10, 2007 may require the payment of an extra fee for prepayment. Therefore, you must pay attention to the conditions of your contract and verify that this is the case for you. For agreements signed after that date, the fee is not charged.
What are the advantages of paying upfront financing?
Below are the main advantages of paying off financing before the deadline.
- discounts on interest (article 52 of the Consumer Protection Code);
- relief in the monthly family budget;
- interesting for financing with interest rates above 10%;
- amortization of value;
- decrease in debt time;
- end of collection of the contract administration fee and mandatory insurance;
- possibility to use the balance of the FGTS (Length of Service Guarantee Fund);
- possibility of planning new dreams;
- emotional tranquility.
And the disadvantages?
The disadvantages of paying off financing before the deadline can be worrying if you don’t have a good financial planning.
Let’s use practical examples: imagine that someone uses every extra amount to get rid of a debt. Is it worth running out of money to pay off the financing?
It may be that using 100% of the capital is not the best way out, as financial unforeseen events can happen at any time. And not having that money available can leave your family’s security weakened.
Partial use of the value is the smartest option, as it allows you to create an emergency reserve or open a savings account, or invest in more profitable investments.
Thus, with consistent and strategic planning, you are able to pay off the debt in less time and still earn interesting returns with some low-risk investment or create an economy.
Financial experts recommend that you keep six to 12 months of two fixed monthly expenses in a highly liquid conservative investment, such as an emergency reserve. In this way, even if there is a sudden loss of income, your financial security will be guaranteed.
Paying off financing before the deadline requires careful analysis, efficient financial planning and patience. You need to analyze your case in a personalized way and see which situation is the most financially advantageous.
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