An early repayment is a payment made prior to the expiration of a contract whose purpose is to fully or partially advance the final payment required or previously contracted.
We talk about depreciation advance payments anticipated as conclusive way of a payment or purchase commitment made in the past.
Usually these operations are carried out with a payment schedule or expiration previously agreed between the participating parties.
As is often the case with other economic terms, its meaning will vary if we look at the area in which it refers: business economics , finance , public debt , banking, commerce …
In the case of financial assets , the practice of early repayments is quite common, since they represent a useful mechanism when paying in advance and transferring the contracted product to a third party. The same happens if what is sought is its cancellation.
Being negotiable financial instruments ( mortgage loans on real estate, promissory notes , treasury bills …) can be commercialized and sold with the pending conditions and agreed upon in the initial hiring or purchase.
Features of early amortization
Regardless of the area we are talking about, any early amortization shares a series of characteristic features to note:
- You can assume both partial and total payment before the contract expires.
- In the case of loans or financial investments, when assuming the advance payment, it is necessary to take into account the volume of interest generated at that date and which must be compensated in the same way.
- In cases like the previous one in which a payment of base and interest is established, any advance payment or amortization assumes that the base to be returned is modified and, therefore, the volume of interest payable in the future varies at the same time.
- These advance payments have consequences such as the change of the due date or the decrease of pending installments until expiration. Normally the client or holder of the good choose between both alternatives. This practice is very common in the repayment of mortgage loans or personal loans.
Often an early repayment is mutually agreed between client and supplier , or borrower and lender . In this way, different contractual details and the conditions established for the stipulated final payment are agreed.
Sometimes there are clauses or contractual points that discourage advance payments. This is done in the form of application of commissions for prepayment, usually as a measure of protection of the financial institution or the bank on its own interests.