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A Guide To Early Repayment Charges

Posted By: James Miller | Posted On: 2008-01-18 | Article ID: 40136

An early redemption penalty is a type of penalty that you are required to pay in the event you pay off what has been lent, such as a mortgage or loan, early. When looking for credit, it is sensible to check out the early redemption clause. This way you will be aware of the amount you may be responsible for in the event you decide to cover the borrowing before the end the full term.

Before we begin, here is a range of the common terms you may come across regarding this topic. An arrangement fee is a sum of money billed to you by a lender or broker should you take out lending such as a mortgage or loan. This is done to take care of their expenses in arranging the lending. A few loan companies will arrange this free of charge in order to encourage new borrowers.

A tie in period on a property mortgage implies you are linked to the mortgage company for a set term. Therefore, the mortgage company will present you with a special deal, such as a fixed rate mortgage loan for the initial two years. However, you may be linked to the mortgage company for a set time period. following, a year for example, in which you will need to pay the standard variable rate. This is a method for mortgage companies to regain the amount of money the gave up in granting you such a good deal, for the initial two years. In the event you wish to change mortgage companies in the midst of the tie in period, you will be required to pay a financial penalty which could mean thousands of pounds.

When looking at borrowing money, you'll no doubt be aware of the old saying 'Shop around for the best deal'. However, while shopping around is the best thing you can do to find the right finance deal, don't just look at the annual percentage rate (APR) on the loan - otherwise you could end up being ripped off by an early redemption penalty.

An early redemption charge (ERC) has many different names - early redemption clause; early repayment penalty; early termination penalty; early redemption fee; financial penalty; and, redemption charge/penalty. However, what it is remains the same. Basically, should you repay your loan early, you may find that you have to pay an early repayment penalty.

If you have a personal loan, the charge may be typically one or two month's worth of interest. However, it is for a mortgage, this figure could literally run in to thousands of pounds, depending on your mortgage agreement.

With the latter, many mortgage companies offer special deals for a set period of your mortgage - for example, for the first two years. So for two years, you are getting a really good deal, probably at discounted rates. However, when it gets to year three and your lender wacks up their interest rates, naturally you will want to look around for another mortgage deal.

However, if you look at your mortgage agreement, you may see that you are tied to the lender for, say, four years. So, in that way, he can make a lot of his money back from you in years three and four.

If you decide to switch to a better deal in year three or four, then you may face an early redemption penalty.

So, how can you stop getting ripped off by lenders charging this fee? First of all, don't take out any loan agreement until you have thoroughly checked out whether there is an early redemption fee.

Any early termination fees should be explained to you before you take out a mortgage. If you are not made aware of any such fees before you agree to the loan, then you should seek legal advice as this is miss-selling
.
However, if you are made aware of the charge and it seems like a reasonable fee and you are happy with the rest of the deal, then go for it.

If it doesn't look right or the charges look a bit unrealistic, then do not proceed. There are plenty of lenders out there who do give personal loans and mortgages without any 'tie-ins'. So, shop around.

 

Article Source: http://www.articlecell.com

About The Author
James Miller
James Miller is a prolific writer who took the time to produce very useful and insightful articles on plenty of subjects for example car loan required and other issues in some way related to car rental insurance and flexible mortgage.



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