Will I be penalised for paying off a loan early?

ireland.man

I've been paying off a fixed rate loan from Bank of Ireland in monthly installments for the past 4 years and now I'm in a position to pay it all at once. The contract is for 5 years though, so I'm wondering if I will face penalties for paying it off that bit sooner?

If so, are these penalties discretionary? I've had several loans from this bank and I've never missed a repayment in 15 years (I've a perfect credit history) so I'm wondering if I could make the case for them not to charge me anything extra for this.

Any thoughts on this would be appreciated.

chris85

ireland.man wrote: »

I've been paying off a fixed rate loan from Bank of Ireland in monthly installments for the past 4 years and now I'm in a position to pay it all at once. The contract is for 5 years though, so I'm wondering if I will face penalties for paying it off that bit sooner?

If so, are these penalties discretionary? I've had several loans from this bank and I've never missed a repayment in 15 years (I've a perfect credit history) so I'm wondering if I could make the case for them not to charge me anything extra for this.

Any thoughts on this would be appreciated.

There is generally a penalty in place since its a fixed rate loan. If it was a variable rate loan there would be no penalities.

ireland.man

chris85 wrote: »

There is generally a penalty in place since its a fixed rate loan. If it was a variable rate loan there would be no penalities.

Thanks Chris. I'm wondering though if there's any flexibility around those penalties- would it be a waste of time for me to ask them to waive it, etc?

BuffyBot

Genrally no. You can ask, but expect to be refused and pleasantly surprised if accepted.

danthefan

I was in a similar situation, I rang AIB and they told me I could pay off the loan whenever I liked without penalty, which I did.

coylemj

danthefan wrote: »

I was in a similar situation, I rang AIB and they told me I could pay off the loan whenever I liked without penalty, which I did.

Was that recently and was it a fixed-rate loan?

I can understand a bank accepting an offer to pay off a fixed-rate loan during a period when interest rates have been rising and your (fixed rate) loan is at a rate that's less that the current variable rate but since interest rates are currently at historic lows, I can't see any bank accepting an offer to pay off a fixed rate loan without penalty.

dotsman

danthefan wrote: »

I was in a similar situation, I rang AIB and they told me I could pay off the loan whenever I liked without penalty, which I did.

I thought AIB don't do fixed rate loans

Marcusm

coylemj wrote: »

Was that recently and was it a fixed-rate loan?

I can understand a bank accepting an offer to pay off a fixed-rate loan during a period when interest rates have been rising and your (fixed rate) loan is at a rate that's less that the current variable rate but since interest rates are currently at historic lows, I can't see any bank accepting an offer to pay off a fixed rate loan without penalty.

I agree with this in principle, however, the underlying fixed rate is only one component of the overall interest charge. Interest margins (the compensation for credit risk and allocation of equity capital) have risen through the recession which may mean that there is less of a differential than might have been expected during other periods. Additionally, the benchmark interest rates pay little relationship to what the Irish banks will pay for wholesale funding int he current market. They are all in the mode of reducing balance sheet size while continuing to advance new loans. There is therefore a benefit in allowing the early redemption of existing loans. The extent to which this has cascaded down to the retail bank is not clear externally.

The OP is best placed to inquire of the bank.

coylemj

Marcusm wrote: »

I agree with this in principle, however, the underlying fixed rate is only one component of the overall interest charge. Interest margins (the compensation for credit risk and allocation of equity capital) have risen through the recession which may mean that there is less of a differential than might have been expected during other periods. Additionally, the benchmark interest rates pay little relationship to what the Irish banks will pay for wholesale funding int he current market. They are all in the mode of reducing balance sheet size while continuing to advance new loans. There is therefore a benefit in allowing the early redemption of existing loans. The extent to which this has cascaded down to the retail bank is not clear externally.

Could you please explain to us how is there a benefit in 'allowing the early redemption of existing loans' while 'continuing to advance new loans' if the existing loans are at a fixed rate of interest and the new loans are at a lower rate of interest?

Marcusm

coylemj wrote: »

Could you please explain to us how is there a benefit in 'allowing the early redemption of existing loans' while 'continuing to advance new loans' if the existing loans are at a fixed rate of interest and the new loans are at a lower rate of interest?

It would not necessarily be thew case that the new loan would be at a lower interest rate - consider the early repayment of a fixed rate mortgage entered into in 2004 with one being issued today - the fixed rate (say for 10 years) on which the loan rate would be based would be much lower today. However, the loss and arrears history together with the precarious borrowing position of Irish banks would likely mean that the actual interest rate charged to the borrower would likely be higher. The difference is the interest margin or spread and these have increased substantially as a result of the financial crisis - this is often quoted for government bonds but applies equally (although less transparently) for individual and corporate loans.

These are the hard metrics, there is also the soft metric - new lending targets - and this can be paramount. Banks are pilloried for not lending new funds and this almost disregards the redemption of prior loans or net lending. In such circumstances, banks often incentivise the repayment of one type of borrowing and making of a new loan to massage the figures. This massaging is going on at banks in many countries in order to justify the "socially useful" measure which is being applied to institutions which have benefited from tax pater support. It may seem illogical and unprofitable (and in certain cases it is unprofitable) but it does happen.

I'm not saying that this means the OP will be allowed to redeem without penalty but, as with all matters of this nature, it means that asking is better than simply accepting that conventional wisdom means that he won't get a good response.

ireland.man

Well the account's closed now and there were no penalties applied. I had a tiny amount of interest added (less than 20 euros) but no additional fees. I didn't want to risk anything so I didn't ask about this issue with them!

As I said, I closed my loan about a year early and while I did pay them a lot more in interest than the loan was worth, of course, they still would've made at least a few hundred euros more off me if I'd continued paying until the last month. Anyway, I'm just glad I'm clear and free now!