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Early Redemption Penalties

There are a lot of potential charges levied in the event of taking credit. One should give careful consideration on all these charges. One of them is the early redemption penalty.

Early Redemption Penalties are charges that are levied on the borrower for repaying the loan before the set time period. This option gives the borrower with varied amount of flexibility as he has the option to exit the loan agreement immediately in case he has excess cash. Therefore early exit can help the borrower save on a lot of interest cost which would be levied to him had he stayed on to the loan agreement for a longer period.

Early Redemption Penalties are levied in many different forms
  • They might be levied on as a percentage of total amount already repaid or a percentage of initial Loan amount
  • Interest calculated for a certain number of months
  • A percentage of the current outstanding loan balance
The charges are levied in almost all kinds of loans except overdrafts and credit cards. Such credit facilities give you an option of repayment of outstanding balance as and when you wish. The interest is charged on outstanding unpaid balance at the end of a period.

Early Redemption Penalties have more significance with respect to mortgages, precisely as many borrowers buy homes with the purpose of living there only for a shorter duration say two to three years. In that case they might need to avail the facility of an early redemption of the mortgage. Therefore Early Redemption Penalties should be given careful consideration before the mortgage is chosen.

There are a number of mortgage deals available in the market which levies no early redemption penalties. Therefore if one is sure of opting out of the loan by making an early repayment then this is the perfect deal for him. Commonly such an option is available in conjunction with discount Mortgage deals. Discount mortgages provide a discounted interest rate on the Standard Variable Rate. Typically, in such deals early redemption penalties are levied at the rate of 2% in the first year of redemption and 1 % in the second year of redemption and no redemption charges thereafter. Therefore circumstances in which the loan would have to be repaid in one or two years of commencement should be avoided as this would lead to a handsome penalty.

Annual Percentage rate or APR is also one of the key considerations in making the right choice while comparing loans.

In simple words all applicable charges need to be studied carefully while opting for a loan. If you feel you might not require redeeming the loan early then you need not be concerned on high the early redemption charges are in the event of early repayment. If you feel Early Redemption Penalties are an important consideration then you must also try to know the policy on overpayments. This option allows you to pay in excess of your loan installment due. Sometimes you might have excess cash and you will benefit if you are allowed to pay more than the current due installment. More repayment means less interest cost in future.