Redemption Penalties

As a rule, most loans have a number of redemption penalties which can be imposed on borrowers. If you are planning to take out a loan, you should be aware of them.

A redemption penalty can be defined as a fee imposed by the lender on any loan which is repaid before the loan term ends.

Such a fee can be applied during the term of the loan on full or partial loan repayments. Most loan agreements on the market include redemption penalties which are applied in the first years of the loan, when the amount of outstanding debt is still high. Normally, the amount of penalty becomes lower over time.
During the process of loan arrangement the details about redemption penalties are included in your loan agreement. This agreement will also contain information about the way the penalty is calculated. Moreover, it must be specified whether or not it will be decreased over a given period of time and how long a borrower can be subject to such a penalty. As for the level of the penalty, it varies greatly from lender to lender, which is why it is critical to read and understand the whole loan agreement before signing, in particular if there is a probability that you might need to repay the loan early. If you have any doubt concerning this or any other area of the agreement, you are not recommended to sign it until you have consulted an independent adviser.
 
Such penalties can be included on all kinds of loans, except credit cards and overdrafts which let you to make repayments as you like. When it comes to mortgages, early redemption penalties are extremely important. Some people, when buying a house, do not intend to stay there for long. Other people may be forced to move sooner than they expected, for instance if a child is born and more space is needed or they found another job. One should carefully consider such possibilities before making a financial commitment.
In most cases, the early redemption penalty is either a specified percentage of the total amount of your loan or the interest accumulated over a certain period of time. Generally ranging from a few hundred to a few thousand pounds, these penalties are designed to make you unwilling to switch to another mortgage provider.
 
It is quite unusual if a decent fixed or discount loan agreement does not contain an early redemption fee. Consequently, if you want to avoid being subject to it, make sure no unexpected circumstances will make you pay off the loan earlier.
 
In case you cannot exclude the probability that you will need to repay your loan before the end term, you’d better check whether the length of your loan agreement meets this requirement (for instance, a five year fixed deal instead of a ten year fixed deal).
 
Although you are likely to find it very difficult to get a decent deal free from any early redemption charges, don’t give up shopping around until you find one because there are multitude of deals on the loan market without the option of redemption penalties.
 
With the help of redemption fees loan providers can lure you into their SVR and therefore make you repay more than it is necessary. In some cases, it would be more reasonable to pay a higher interest rate from the very beginning to avoid being trapped in an expensive deal afterwards.
 
Thus, when the initial interest rate seems too good to be true, check how long any redemption penalty lasts for or, in other words, how long you may have to pay an uncompetitive rate.
 


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