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The prepayment

How can you do well with prepayment?

Prepayment doesn’t even play as an option for many people, not even in the heads. When it comes to loan repayment, it is mostly classified as an overhead. It’s pretty much the same as you have to pay (at least in the good case you usually pay) for electricity, water, car maintenance, and more. Many don’t even think that as long as it doesn’t make much sense to tell the heating bill that I would pay in for the next 5 years, it can be reasonable for a loan.

 

How to use the prepayment

This is no different for businesses. There, too, a borrowed loan is usually considered part of the cash flow, which if e.g. it was taken for 5 years, then you don’t have to smell there for 5 years, you just produce it with the loan, from which you then repay.

You need to know that most loans can be repaid in advance at any time, there are very few cases where you have a contract which forbids. However, pay attention to what you signed at the beginning of the start, because it is possible that the bank will not necessarily allow you to make a prepayment at the very beginning of the term.

Why is it good for you to prepay?

Well, if you have a credit card with an average annual interest rate of 10-15% or more on average, then if you have repaid this, it is roughly equivalent to having an investment that brings that% every year. (After all, zero can come out if you produce that much somewhere else.) Wouldn’t you be happy to give up such a guaranteed return, would you?
As credit cards typically have a term of a few years but a high APR, it is advisable to prioritize this goal and pay out as soon as possible.

In the case of a mortgage-backed loan in an equal monthly installment (called an annuity), it also makes sense to make at least a small prepayment, so that you can still have a lot of money in your pocket (which you would pay as interest anyway). Because there’s a little longer maturity and lower interest rates, this can easily mislead many people. It looks tiny, but as time goes on, a lot of little ones go for a lot.

If we recalculate a little, it is easy to see that taking out a loan of 20 million for 20 years, with interest at 5%, we pay the bank about 11.6 million in interest. (This info was provided by this MNB calculator, so if you are interested in other numbers, feel free to play with it a bit 🙂)
Since this 11 million is not small, so you must weight optimally.

But you can use the calculators on the Silver Moon’s site as well.

You could say that, but then at least yours was what you bought. I have some bad news: that house is still the bank’s. If you don’t believe it, try not to pay the installments. No later than 90 days after and you surely realize who the real owner is 🙂.

Renting / renting a site isn’t always a waste of money either, so before buying a property, recalculate whether you really need it now or just want it. There are times when it’s time to buy your own apartment, but if it hasn’t come yet, you’d take it beyond your means.
If it brings in more (say because it produces) than you give out, it’s even okay. Otherwise, it’s worth thinking twice. If you make a bad decision, you will be charitable with the bank, but if you will not be able to pay, the bank will not be charitable with you.
To help you decide which is good debt and which is bad, my previous article will help.

What are your options for prepaying a loan?

The prepayment of a larger amount of credit from your own pocket, whether on a private or corporate side, is not very common.

With one exception: when you decide you have found another bank that offers you more favorable terms. It’s not really prepayment because your credit is retained, you just pay in a different direction. This is nothing more than a loan redemption.

At this point, many people are deterred from having to start the whole procedure all over again (look for a bank that is not surely the best, have to line up for each piece of paper, etc.) We can partially take the latter off your shoulders, you can contact us.

And you don’t need us to think it’s worth it for you: a piece of paper is enough.
It’s pretty easy to calculate how much loan interest you’ll repay if you stay with the original bank (this is what the bank will give you), and the bank that you already look will tell you the same. If you look at the difference between the two, you can see from it how much stays in your pocket when you deduct from it the cost of switching banks.

In the case of prepayment or final repayment (when you pay part or all of your principal debt in addition to the normal repayment), there is still a typically 2% prepayment fee (at least in Hungary), which is low compared to the current interest rate of at least 3 or more %. So if only this one would hold you back: you would rather pay 2% now for a certain amount of money than at least 3% for years.

What order do you choose for prepayment?

If everything would go at once, you wouldn’t have a single loan from tomorrow. Neither corporate, nor individual, nor any. If you’re reading this post, you probably didn’t take the lottery jackpot last time. However, let’s say you’ve managed to get a little stronger financially, so you have the option to make an extra deposit each month.

In a good case, you use that extra money wisely and you don’t go on vacation for at least part of it.

There are 2 separate “schools” for the order of prepayments:

The credit snowball method

It says that you repay the smallest amount of credit first with the extra money, regardless of the term and interest, and repay the rest in the normal way. Then, once you have paid off the smallest amount of credit, you pay the extra money and the already repaid installment into the next minimum, and so on until you reach the end.
This opportunity can be a motivation for you as you can see the “number” of loans running out. So you can experience some progress sooner.

The credit avalanche method

According to this, repay the highest cost loan in priority, regardless of its amount or term. After this runs out comes the next biggest, the next one, and so on.
In this case, because you pay much less interest than in the first case, you can spend a lot more money on the extra repayments. That way, its interest also drops, and you can reach the end completely years earlier than the other. However, the “number” of loans is declining more slowly, so it requires more discipline.

What you can do more reasonably is to pay off your high-interest loans (or not take them out) and then invest part / all of the amount you paid earlier to repay the loan each month.

That sounds very logical. Right?

Practically a textbook sample example. At the time, in the college I might even have been praised for it.
As with almost any useful and informative textbook, you can take ideas from the example above that point you forward. On the other hand, like almost every useful and informative textbook, it builds on information and thus omits the person himself.

There are three pitfalls for prepayment

  • You don’t pay off the mortgage either, you spend the money (“we can afford this little one more”) so you sit on the floor out of two chairs.
  • Pay off the loan, and when you get to the end, you take on the next one immediately (“I’m already rewarding myself!”)
  • You pay for it, but you don’t put it aside for yourself (“now we’re going on vacation / winter, then next month / then if the child graduated / moved out of his grandmother / etc. we set it aside”).

There are a few reasons against prepayment

  • You want to develop / start a business, and you would take the money you intended to repay with conditions similar to the interest on your current loan anyway. Then, unless your accountant says otherwise, it would be an unnecessary cost for you to repay your existing loan and take out a similar one. (there is a playing field between talking about business or retail credit, but your accountant will help)
  • Some entrepreneurs may have some tax benefits from keeping the loan. Ask your accountant about risks and side effects 🙂. So as with allergens, I have to state here that “it contains a trace of tax advantage”
    A company can use the interest on the loan as a reduction in the corporate tax base. So you use the money, write it down, and produce with it. (Provided this is true of you all.). Calculate this properly, because credit is not a game even if your tax base is reduced.
  • You build your own “gold reserve” of your money in excess of your normal repayment so that if there is a problem, you will still prosper. The emergency reserve gives you a solution.
  • You understand the money, and somewhere else you get a significantly higher return on your money than you would save on interest.

No need to prepay because inflation “helps” anyway?

The question may arise in you that if you had taken out a loan 20 years ago, that lots of money would not be worth exactly as much as it is now because of inflation. And you’re right about that! However, you can only build on the theory that you are cunningly completely infiltrating the entire debt. This is because it is a state privilege, an average earth mortal can play this with 0% subsidized loans.

Annuity mortgage loan repayment

 

As you can see, normally, in the case of an annuity loan, which is most often disbursed by banks, you pay far much more interest in the beginning than you repay the principal.

Normally, one of your options is if the loan has a fixed interest rate with a sufficiently long interest period. The bank will then charge you without remorse. In the order of magnitude, you pay more with 2-3 months of installments a year (That’s how much you get it more expensive)
The other option is if the interest rate is short-term, e.g. 3 months. In such cases, although you will pretty much inflate the capital (though not completely), due to the change in interest rates, the amount of your repayment will follow the inflation very nicely, and what you win on the ferry will be lost at customs.

Is prepayment or investment more important?

Practically pay attention to balance. If you have a high APR loan, pay it out or repay it regularly. Make it a priority. Once you have that, your situation is easier.
Two things to keep in mind:

  • Have an emergency reserve regardless of loan repayment. Of this, you can live for about 6 months (This is also important as a company!). Having it can be life-saving, you can even do better in terms of paying off the loan. Because if your income is lost, you can still pay the loan.
  • Define your credit-independent goals and coordinate your repayment with this. Money needs time to work. If you know what your goals are, you know roughly when you want them, then you’ll know how much you need for them. From here, just add-subtract to which amount you are grouping.

Questions:

  1. Have you encountered a similar credit situation? How did you solve it?
  2. In the case of an existing loan, would you even consider prepayment on an ad hoc basis?
  3. How often do you review your existing loan agreements in the hope of a more profitable option in the long run?

You can ask questions on this topic in the contact menu, or feel free to comment on social media.

You can access this article in Hungarian and German
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