Loan Cancellation Calculation: French Interest and Penalties

Calculation of the loan repayment 

Calculation of the loan repayment 

The calculation of the loan repayment reveals how much the customer will save by liquidating in advance the loan he has contracted with a bank. Those who have signed a loan have the freedom to extinguish it in advance, repaying the residual capital in a single payment, without paying the subsequent installments. This operation is regulated by the loan agreement, which determines the timing and methods. However, to know how to pay off a loan in the best way, it is advisable to calculate whether this choice will lead to real savings.

The main source of savings from early repayment of a loan is the possibility of not paying interest on installments still to be paid. A loan provides for the recognition of an interest rate to the bank, which distributes the payment on the repayment installments. Well, the calculation of the early repayment of a loan allows us to note how, once this decision is made, less interest will be paid than would have been incurred by bringing the loan to its natural maturity.

The question to ask is: how much do you really save? The answer depends on how the depreciation is calculated and the amount of the penalty that the bank will ask in exchange for early repayment. To make a profit, the penalty must be less than the interest saved. However, this may not even happen, if the method of calculating the loan is the French one, which concentrates the payment of interest in the first installments of the loan. It is probable that if the loan has lasted for quite a long time, the interests still to be recognized are few and the amount of the penalty exceeds its value.

The calculation of the repayment of the loan is different, in particular after the Bersani Law enters into force: this legislation provides that for mortgages signed after 2007, early termination is completely free, given that the banks are prohibited from request a penalty from their customers. In this case, therefore, as there is no possibility of a penalty, savings on interest could be more substantial. The early repayment of a loan for the purchase of a property is therefore potentially more advantageous than that of a normal loan, such as a personal loan. However, it must also be taken into account that the amount of a mortgage is much higher.