There are many situations where it may be necessary to cancel a loan. But the termination of a loan has far more far-reaching consequences than, for example, a mobile phone contract. It is therefore advisable that a borrower, before he becomes active accordingly, aware of the consequences and planning the project exactly.
Cancel a loan: the “classic” reasons
Let’s start with when it makes sense to write the notice for a loan. There are four reasons that are so often invoked that they are often referred to as “the classic arguments”:
For example, a partner alone can no longer hold the house. Or there is a common desire of both spouses to break up a joint loan. There may also be a written agreement on what to do in the event of a marriage with a joint loan.
2. Falling lending rates:
Anyone who has an old loan certainly pays too high interest. A rescheduling therefore makes sense. Before it can be rescheduled, the old loan is to be terminated.
3. Change of workplace:
A job change may require the termination of a loan for several reasons. Anyone who earns more wants to carry out a rate adjustment in his favor and therefore a rescheduling. If you earn less, you want to pay less in the future. You may also move to another city and therefore have to sell your house or apartment in the old place of residence in order to be able to pay for another home in your new home. For the original real estate loan then a termination must be pronounced.
4. Life changes significantly:
If the life situation changes significantly, it may also be necessary to cancel a loan. For example, those who marry might want to trade a single loan for a joint loan. At the death of the partner, it may be necessary to go the exact direction in the opposite direction. Especially with a long-term loan, the change in the life situation is a statistical probability: To avoid having to terminate such a loan every time, many banks offer loan models that can be flexibly adjusted – for example through high special repayment options or optional cash injections and installment pauses. When planning a loan, such models should therefore be high on the list.
Cancel a loan: Is there a legal protection against dismissal?
Banks often point out that the termination of a loan is of course possible – just against payment of a prepayment penalty. Often, therefore, the question is asked whether there may not be a legal protection against dismissal for loans. The German Federal Financial Supervisory Authority has accepted this and has put together five scenarios for which protection against dismissal exists:
1. The loan runs longer than the fixed interest rate:
Just under real estate loans, this credit model is standard. Often there is the accusation that the initially low interest rates are really just “lock offers”. Later, the “bill” will be presented in the form of significantly higher connection interest. In fact, before it is a protection against dismissal: During the interest rate commitment may not terminate, after the expiration of that according to § 489 paragraph 1 no. 1 BGB, but with a one-month period already. But beware: Previous agreements can cancel this right to terminate. This also applies to all other deadlines that are presented here.
2. The loan has a variable interest rate:
Many borrowers like to opt for a variable rate loan because it seems to hold the promise to switch to cheaper deals anytime. If the game with the variable interest is too hot, may be pleased about a protection against dismissal: According to §489 paragraph 2 BGB such credit models may be terminated with a notice period of three months.
3. A loan has a fixed interest rate of more than ten years:
This case has already caused some confusion: loans can be terminated after ten years with a period of six months. The problem is, as already mentioned in subsection 1: no cancellation can be made during an interest rate commitment. Dufol has therefore clarified the current view of law with reference to §489 (1) No. 2 BGB (German Civil Code): A right of termination after ten years does not exist for such a loan. Instead, you can cancel the end of the fixed interest rate. The notice period of six months remains.
4. Consumer credit agreements:
These are the standard installment loans that most people use over and over again. Basically, these contracts may be terminated. Unless otherwise agreed, the notice period is one month. With previously defined terms of the respective loan, which is standard, the borrower may receive a prepayment penalty. According to § 502 BGB, this amounts to a maximum of one percent, if the credit agreement runs for more than a year. If the remaining term has already fallen below one year, then a maximum of 0.5 percent prepayment penalty may be levied.
5. The loan is secured by a mortgage or a mortgage:
Canceling a loan secured by a mortgage or a mortgage is difficult. Actually, the legislator has determined that a corresponding step is not permitted. Exceptions are “exceptional circumstances” that necessitate a sale of the property in question. The termination of such a loan, however, is expensive: Basically, the lender may collect a prepayment penalty. For real estate loans, however, the “1 percent” limit applies. The lender may set the border himself – accordingly, the penalties are often very sensitive.
Cancel a loan: A sample invoice for prepayment penalty
Suppose the case, a person fulfills the dream of the new car and takes for 20,000 euros credit over seven years. After three and a half years remains a credit balance of 10,000 euros. Through an inheritance, however, the person has the money on the side and therefore would like to pay off the loan early. The bank may charge 1 percent prepayment penalty – that is 100 euros.
Put the case, the inheritance comes only after six years and eleven months: The remaining debt would be about 3100 euros: The prepayment penalty would be in this case accordingly 31 euros. It would make sense to wait one more month for the loan to be canceled: the remaining debt of the loan would fall to about 2900 euros, and half the prepayment penalty will be halved. To pay would be still 14.50 euros. Even with the interest still payable for the additional month, the savings should be around 15 euros.
The example shows two things: On the one hand, a maximum early repayment penalty of one percent sounds comparably low. In fact, the amount in absolute terms, however, can be very high: Especially for debt, this is to be considered, because with those the penalty payment must be made practically always.
On the other hand, the timing of the termination of a loan is very important: In particular, when you are close to the limit of one year, it almost always makes sense to wait, so that the reduced prepayment penalty is accompanied by a significant savings. The rule of thumb is that anyone less than six months away from the one-year deadline should wait to be dismissed.
To terminate a loan agreement correctly
Finally, it is about the question of how concrete a loan is to terminate. Generally this step has to be done in written form. It is advisable to hand in the letter personally in the branch and to have the receipt acknowledged or to send it by post as a registered letter with acknowledgment of receipt. So you can make sure that the lender has actually received the notice. In addition, you can prove that you have terminated the loan within the period. The following must contain a letter:
Name, address and other contact details of the borrower
Name or name (ie Sparkasse Köln or similar) of the lender
Date of termination (not equivalent to the date of writing!)
Contract or credit account number
The following pattern can help:
Address of the borrower location, date
Address and name of the lender
Dear Ladies and Gentlemen of the XXX,
With today’s letter, I terminate my loan agreement signed with you on XXX (date of completion in the form dd.mm.yyyy) on time XXX (termination date). My loan has the contract number XXX. The original loan amount was XXX.
With this letter I give you the authorization for direct debit to debit the remaining loan amount from my account. The account details are:
Name account holder
BIC (for a foreign account)
I kindly ask you to confirm the termination immediately. Please also tell me how much of the remainder of the loan is to be cleared, how it is composed and when you will use it.
Conclusion: Nothing rush in the credit termination
As previous lines illustrate, it is relatively easy to cancel a loan. However, the whole process needs some preparation. Otherwise, there is a risk that extremely costly mistakes can be made. At the beginning there are some central research works: For example, is there a legal dismissal protection, which allows to terminate the loan without penalty? If this is not the case, the next question to ask is: is the time for a loan cancellation favorable? Often it would make sense to wait quite some time to achieve the reduced prepayment penalty or the moment when legal protection against dismissal exists. Especially with rescheduling, which only make sense if the debt is reduced by them, the importance of the right timing is hard to overestimate.
Therefore, plan your credit cancellation in peace, read all relevant documents again and work with a calculator to calculate different scenarios. Your wallet will thank you.