Early Loan Repayment: Guide to Closing Your Loan
Paying off your loan before its maturity can save you significant interest costs in the long run. However, depending on your loan type and agreement, banks may charge an "early repayment penalty" or "exit fee."
Key Terms
- Remaining Principal: The net amount you still owe to the bank as of today, excluding future interest.
- Early Repayment Penalty: A fee charged by lenders to recover potential interest loss when a debt is paid off early.
- Mortgage (Housing Loan): A long-term loan specifically for purchasing property, often subject to different regulatory fee caps.
- Consumer Loan: Short or medium-term loans like personal or auto loans.
How Early Repayment Penalties Work
Regulations regarding early repayment varies by country. In many jurisdictions, including Turkey:
- Personal/Auto Loans: Usually, no early repayment penalty can be charged. You only pay back the remaining principal.
- Mortgages (Maturity < 36 Months): A penalty cap of 1% of the remaining principal is often applied.
- Mortgages (Maturity > 36 Months): A penalty cap of 2% of the remaining principal is typically applied.
Step-by-Step Calculation Example
Suppose you want to close a mortgage with a remaining principal of $500,000 and a maturity of more than 36 months:
- Penalty Rate: 2%
- Penalty Amount:
$500,000 * 2% = $10,000 - Total Closing Amount:
$500,000 + $10,000 = $510,000
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