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Repayment of a loan: Extracurricular payments and redemption

A loan that has been granted to you by a bank must be repaid at some point, of course. Mostly, the first instalments are due soon after receiving the loan. The only exception: a student loan. Over which period of time you have to repay your loan and how high your repayment rates are, will be defined in a contract beforehand. The process of repaying your debt is also called redemption.

Redemption

Normally, there is a repayment plan that tells the debtor how and when he has to repay the money. However, there are also some loans that can be repaid extracurricularly. Here, you do not have fixed instalments and you can repay your loan whenever you like. This type of loan often has high interest rates as banks prefer to know exactly when they will receive their money back. By applying higher interest rates, the banks hedge against a repayment failure.

Extracurricular payments

Extracurricular payments are payments made outside the repayment plan. Whether you are allowed to make extracurricular payments must be discussed before receiving the loan and fixed in your contract. Extracurricular payments help the debtor to lower his instalments or repay the loan faster which is, of course, of advantage for the debtor.

As banks lose part of their revenue due to extracurricular payments, they might charge you a early redemption fee if your contract does not explicitly allow them. Depending on the country you live in, there might be a cap on these fees, e.g. 1% of the sum you repaid early.