Inspired by a discussion in another thread, I couldn’t find a Key Post on how Personal Loans work, particularly around repaying Personal loans early, so here’s first attempt at it. I'm happy to take feedback and make amendments for people’s experiences with different lenders, and any practical items to watch out for. Or add if there are specific questions people think could create an FAQ to understand loans better.
Firstly, this post is about personal loans. Not Hire Purchase / PCP agreements. And not mortgages.
Can I repay a loan early, or make overpayments? Even if it's fixed rate?
There seems to be a lot of confusion about whether or not a Personal Loan can be repaid early, either in part of in full. It’s not helped by Credit Union advertising about how flexible they are.
Here’s the language used on the ILCU Website:
“Why? Imagine a Different Kind of Lender
Imagine – A straight-forward loan, with no sneaky conditions.
Credit unions offer flexible personal loans of all sizes. You can pay off your loan early or increase your repayments, all without any scary penalties.”
So, banks obviously aren’t flexible, and have lots of scary penalties? Right?
Well, no.
All Personal Loans between EUR 200 and 75,000 are covered by the European Communities (Consumer Credit Agreements) Regulations 2010 (S.I. 281/2010). It applies equally to Credit Unions and Banks. This legislation protects a borrower’s right to partially or fully repay their loan early, and sets out whether a fee can be charged by the lender. Where an early repayment is made, the borrower is entitled to a reduction in the total cost of the credit to the extent of the interest and the costs for the remaining duration of the agreement.
So whether you’ve borrowed from a Bank or Credit Union, you can make one-off lump sum overpayments, regular overpayments, or repay your loan in full ahead of schedule. And doing so reduces the total interest charged.
Well, what about all those scary penalties?
Again, under the same legislation, a fee can only be imposed by the lender where both:
If it is a fixed rate, and if you repay less than EUR 10,000 ahead of schedule there can’t be a fee.
And if a fee does apply, there is a cap in the legislation:
So what about the main lenders, and fees?:
AIB:
Personal loans are Variable interest rate. There is no fee to repay ahead of schedule.
AvantCard / An Post:
Although loans are fixed rate, their T&Cs state that there is no fee for early repayment
BOI:
Currently available personal loans are variable. No fee for early repayment of variable rate.
Their T&C’s cover the treatment of early repayment of fixed rate loans, aligned with legislation
Credit Unions:
For any that I have checked, the rates all appear to be contractually variable rate. There are no fees for early repayments.
KBC:
Personal Loans are fixed Rate. There is a fee for early repayments in excess of 10,000, aligned with legislation.
PTSB:
Personal Loans are variable rate
Ulster Bank:
Personal loans are fixed rate. A fee applies for early repayment (I haven’t reviewed their T&Cs)
What about Practicalities of overpaying?
One argument put forward is that the Credit Union is more flexible, because you can pop in and overpay the loan whenever you like.
Personally I find it even more convenient to log onto my internet banking, and transfer money from my Current account to the loan. I haven’t dealt with every bank, but I assume they all let you transfer funds to the loan? (Happy to correct if people’s experience differs)
As a borrower, I had a loan with AIB that I wanted to repay in full, early, and I just phoned them, and asked to close the account, taking the funds from my AIB current account. The account was closed the next day.
I understand that there are some constraints with some lenders where the regular repayments can only be arranged monthly. This would be factor for people paid weekly who are trying to budget their money.
And what about rescheduling if I run into difficulties making repayments? Aren’t Credit Unions more flexible?
Historically, there was some truth in the argument that Credit Unions would reschedule a loan quickly if you needed them to. So much truth in fact, that the Central Bank had to tighten up the rules to make sure that non-performing loans weren’t being hidden by constant reschedules. Under the amended Section 35 of the Credit Union Act, it should be no easier to get a Credit Union loan rescheduled than a Bank loan. If you meet the Credit Union criteria, you should meet any Bnk criteria (it’s very similar to the concept of ‘forebearance’ in banking regulation).
The Rescheduled Loan rules only apply where the loan was in arrears before the terms were amended, or the loan would have gone into arrears if the terms hadn’t been amended as the original payments could not be met. A Credit Union must set aside a provision against rescheduled loans, except in specific circumstances (it’s temporary, the loan is extended by less than 6 months, and they evidence it, etc…).
The guidance notes from CBI include:
2. Lending Practices for Rescheduled Loans
2.1 Loans must only be rescheduled following a thorough credit assessment, supported by sufficient evidence, where the credit union has clearly established the ability of the member to repay in accordance with the revised terms of the loan.
2.2 The credit union must require a borrower to submit an application to reschedule a loan. The application must be accompanied by the member’s written consent to reschedule the loan and evidence of the change in the member’s circumstances.
2.3 Loans must only be rescheduled with the agreement of the member and where relevant, the guarantor. A new credit agreement must be drawn up and the member must be made aware of any changes to the information contained in the original credit agreement, including changes to the cost of credit.
... Etc. etc
All the banks have specialist teams that work on rescheduling loans. I've never had to deal with them, but they shouldn't be asking for any different information than a Credit Union would need for a straight forward rescheduling.
What about Secured Loans? Aren't they great?!
No post about loans would be complete without mentioning secured loans.
'What's a secured loan', you may ask?
Well, imagine you have 10,000. You put it in the Credit Union. Now, you need 8,000 to do some renovations. Instead of taking your own money out of the Credit Union, you are offered something called a 'Savings Secured Loan'. So you can borrow 8,000, at the low rate of 4.7% APR or higher, so long as you leave your savings there. So, you pay to borrow your own money back from the Credit Union!
Yes, it's a fantastic product. Just not fantastic for you! It's purely a psychological game of you feeling safe that you still have savings.
Cash secured loans are also available from PTSB, so it's not just Credit Unions.
Firstly, this post is about personal loans. Not Hire Purchase / PCP agreements. And not mortgages.
Can I repay a loan early, or make overpayments? Even if it's fixed rate?
There seems to be a lot of confusion about whether or not a Personal Loan can be repaid early, either in part of in full. It’s not helped by Credit Union advertising about how flexible they are.
Here’s the language used on the ILCU Website:
“Why? Imagine a Different Kind of Lender
Imagine – A straight-forward loan, with no sneaky conditions.
Credit unions offer flexible personal loans of all sizes. You can pay off your loan early or increase your repayments, all without any scary penalties.”
So, banks obviously aren’t flexible, and have lots of scary penalties? Right?
Well, no.
All Personal Loans between EUR 200 and 75,000 are covered by the European Communities (Consumer Credit Agreements) Regulations 2010 (S.I. 281/2010). It applies equally to Credit Unions and Banks. This legislation protects a borrower’s right to partially or fully repay their loan early, and sets out whether a fee can be charged by the lender. Where an early repayment is made, the borrower is entitled to a reduction in the total cost of the credit to the extent of the interest and the costs for the remaining duration of the agreement.
So whether you’ve borrowed from a Bank or Credit Union, you can make one-off lump sum overpayments, regular overpayments, or repay your loan in full ahead of schedule. And doing so reduces the total interest charged.
Well, what about all those scary penalties?
Again, under the same legislation, a fee can only be imposed by the lender where both:
- The loan is a fixed rate, and
- You repay in excess of 10,000 early in any 12 month period.
If it is a fixed rate, and if you repay less than EUR 10,000 ahead of schedule there can’t be a fee.
And if a fee does apply, there is a cap in the legislation:
- If more than 1 year remains on the fixed term, the fee is capped at 1% of the amount repaid early
- If less than 1 year remains, the fee is capped at 0.5%
- In any case, the fee cannot be more than the amount of interest the borrower would have been charged if they didn’t repay early
So what about the main lenders, and fees?:
AIB:
Personal loans are Variable interest rate. There is no fee to repay ahead of schedule.
AvantCard / An Post:
Although loans are fixed rate, their T&Cs state that there is no fee for early repayment
BOI:
Currently available personal loans are variable. No fee for early repayment of variable rate.
Their T&C’s cover the treatment of early repayment of fixed rate loans, aligned with legislation
Credit Unions:
For any that I have checked, the rates all appear to be contractually variable rate. There are no fees for early repayments.
KBC:
Personal Loans are fixed Rate. There is a fee for early repayments in excess of 10,000, aligned with legislation.
PTSB:
Personal Loans are variable rate
Ulster Bank:
Personal loans are fixed rate. A fee applies for early repayment (I haven’t reviewed their T&Cs)
What about Practicalities of overpaying?
One argument put forward is that the Credit Union is more flexible, because you can pop in and overpay the loan whenever you like.
Personally I find it even more convenient to log onto my internet banking, and transfer money from my Current account to the loan. I haven’t dealt with every bank, but I assume they all let you transfer funds to the loan? (Happy to correct if people’s experience differs)
As a borrower, I had a loan with AIB that I wanted to repay in full, early, and I just phoned them, and asked to close the account, taking the funds from my AIB current account. The account was closed the next day.
I understand that there are some constraints with some lenders where the regular repayments can only be arranged monthly. This would be factor for people paid weekly who are trying to budget their money.
And what about rescheduling if I run into difficulties making repayments? Aren’t Credit Unions more flexible?
Historically, there was some truth in the argument that Credit Unions would reschedule a loan quickly if you needed them to. So much truth in fact, that the Central Bank had to tighten up the rules to make sure that non-performing loans weren’t being hidden by constant reschedules. Under the amended Section 35 of the Credit Union Act, it should be no easier to get a Credit Union loan rescheduled than a Bank loan. If you meet the Credit Union criteria, you should meet any Bnk criteria (it’s very similar to the concept of ‘forebearance’ in banking regulation).
The Rescheduled Loan rules only apply where the loan was in arrears before the terms were amended, or the loan would have gone into arrears if the terms hadn’t been amended as the original payments could not be met. A Credit Union must set aside a provision against rescheduled loans, except in specific circumstances (it’s temporary, the loan is extended by less than 6 months, and they evidence it, etc…).
The guidance notes from CBI include:
2. Lending Practices for Rescheduled Loans
2.1 Loans must only be rescheduled following a thorough credit assessment, supported by sufficient evidence, where the credit union has clearly established the ability of the member to repay in accordance with the revised terms of the loan.
2.2 The credit union must require a borrower to submit an application to reschedule a loan. The application must be accompanied by the member’s written consent to reschedule the loan and evidence of the change in the member’s circumstances.
2.3 Loans must only be rescheduled with the agreement of the member and where relevant, the guarantor. A new credit agreement must be drawn up and the member must be made aware of any changes to the information contained in the original credit agreement, including changes to the cost of credit.
... Etc. etc
All the banks have specialist teams that work on rescheduling loans. I've never had to deal with them, but they shouldn't be asking for any different information than a Credit Union would need for a straight forward rescheduling.
What about Secured Loans? Aren't they great?!
No post about loans would be complete without mentioning secured loans.
'What's a secured loan', you may ask?
Well, imagine you have 10,000. You put it in the Credit Union. Now, you need 8,000 to do some renovations. Instead of taking your own money out of the Credit Union, you are offered something called a 'Savings Secured Loan'. So you can borrow 8,000, at the low rate of 4.7% APR or higher, so long as you leave your savings there. So, you pay to borrow your own money back from the Credit Union!
Yes, it's a fantastic product. Just not fantastic for you! It's purely a psychological game of you feeling safe that you still have savings.
Cash secured loans are also available from PTSB, so it's not just Credit Unions.
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