If you have borrowed money, you repay this borrowed money in monthly installments. This applies to both mortgage loans and consumer loans. Examples of the latter group are the revolving credit and the personal loan. Of both the mortgage and the consumer loan, in the vast majority of cases, the monthly installment consists of a repayment and interest.
It may sound a bit strange, but you may be confronted with so-called penalty interest on the personal loan and the mortgage loan. The reason why you pay penalty interest lies in the fact that the lender misses interest income with extra or early repayment.
The personal loan
We take the personal loan first. This is the loan form without surprises. The interest is fixed and you repay the loan in a number of fixed monthly installments. The penalty interest comes into play if you want to pay off the personal loan more quickly or you want to repay it extra.
With regard to penalty interest, there is a European directive that reads as follows:
You pay 0.5% of the amount that you pay off prematurely, if the loan runs for a maximum of one year.
You pay 1% of the amount that you pay off early, if the loan is still running for at least a year.
European guide line
Most lenders follow this European directive. However, there are also lenders who do not charge penalty interest for early repayment of a personal loan.
You can also incur penalty interest when you make early or extra repayments on your mortgage. It is of course very unfortunate if you have to pay for this. Always ask your mortgage provider how much you can pay each year without penalty. Most mortgage lenders apply the guideline of 10 or 20 percent of the mortgage debt.
You may also be faced with penalty interest on your mortgage if you want to transfer it to another party. Whether, and if so, how much you must pay in penalty interest depends on the remaining term of your mortgage. Of course, the shorter the term, the lower the penalty interest. In a single case, the penalty interest is tax deductible. This is only the case if you are faced with penalty interest in connection with the purchase of a new home.
What is penalty interest
Penalty interest is really nothing else than a compensation that you have to pay to your lender for the fact that this interest goes wrong because you pay off the credit there earlier than agreed, so it is a compensation. The penalty interest can occur with all loans and it is therefore important that you take this into account when taking out a loan. Even a credit with a mail order company may have included a clause so that when you pay off the amount due in one go, additional costs will be charged.
Penalty interest when buying a car
When purchasing a car, however, something remarkable occurs. The prices of cars that you see on television are generally prices based on the fact that you take out financing with this car with the same company. In other words, if you have savings and you pay the car in cash, then it can happen that you have to pay a higher amount, actually a penalty interest without ever having taken out a credit for that purpose.