A borrower can at any time decides to repay a loan repurchase agreement early. In this case, the procedure to be followed remains the same as that applied during the early repayment of a conventional loan.
A reduction in its financial charges or an unexpected increase in its cash inflows sometimes encourages a borrower to free himself of his consumer credits before the expiration of the contract.
The Consumer Code, in article L311-29, recognizes this right to the customer’s early reimbursement. The same text also specifies that no compensation may be required from the subscriber. There are exceptions, however.
Since May 2011 and the entry into force of the Lagarde Law, banks have been authorized to fix compensation for the early repayment of depreciable consumer loans in excess of 10,000 dollars. These costs must not, however, exceed the amount of interest due.
They are also capped at 0.5% of the remaining capital – if the loan repurchase contract expires before 1 year – or 1% of the capital, if the remaining term is more than 1 year. Note that any compensation is prohibited when the rate of the credit contract is variable.
The early repayment of mortgage loans is governed by articles R312-2 and L312-21 of the Consumer Code. According to these texts, the banks cannot demand compensation greater than 6 months of interest on the amount reimbursed.
The fees are calculated on the basis of the average rate of the loan repurchase agreement. In all cases, the “penalties” must not exceed 3% of the capital remaining due.
For contracts entered into after July 1, 1999, no compensation is required for certain exceptional reasons, such as the sale of housing due to a professional move, job loss, death, etc.
Early repayment is generally carried out as part of a mortgage repurchase transaction, but this is not the only possible scenario. A loan can be repaid in advance as part of a loan consolidation but also at the full will of the borrower.
The resale of the property, a sum received as an inheritance or a gain of money can make it possible to settle the loan in full. A statement request must be made by the borrower to find out the exact amount to be reimbursed.
The bank and the borrower can freely discuss the amount of the prepayment penalties, even before signing the credit repurchase contract. It is, therefore, possible to negotiate a lowering of benefits, even if negotiations can prove difficult.
For the creditor, the reimbursement costs correspond in fact to the interest – or part of the interest – that he should have received on the loan contract.