Early Repayment Charge
An early repayment charge is a penalty for paying off your debts sooner than you are supposed to, or sometimes for paying more than you are supposed to at any particular repayment time. The early repayment charge may seem a trifle strange – after all, would you penalise someone who paid you back what they owed you sooner than you expected? Obviously the normal man in the street would be delighted if he asked for his tenner back by the end of next week, and you give it him this Friday. Sadly, banks and other lenders don’t see it that way.
When you take out a loan, the bank expects a certain amount of money over a certain period of time. Because of the way interest is calculated, early repayment means that the bank gets less money back from the loan than it expected to. If there were no early repayment charges, and people could pay back more than they are meant to whenever they wanted to, this could leave the bank with a large shortfall in the long term since they calculate what they can expext to receive for many years into the future. Essentially the early repayment charge helps the bank to keep it’s future forecasts accurate.
The early repayment charge can also be limited to a number of years, after which there will be no penalty for repaying as much of your debt as you want.
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