Early Termination Personal Payday Loan: Extinction Penalty, Residual Debt Calculation

With the legislation governing the consumer credit reform (Legislative Decree no. 141 of 2010, art. 125 sexies), early repayment of the loan is possible, but it is good to be aware of the methods required to be able to assess when the repayment is convenient early or not.

The early repayment of the loan, at any time, partially or totally, is a right of the consumer, who can extinguish a personal payday loan before its natural expiry, established by the stipulated contract, paying the due and paying a penalty of early extinction , which cannot exceed 1% of the residual debt.
The penalty represents the compensation for the lender (bank or financial company) and cannot exceed the amount of interest that the consumer would have paid to conclude the contract in the established time.

When is it best to extinguish Aunt Polly in advance?

When is it best to extinguish Aunt Polly in advance?

The consumer who reimburses in full or in part the amount due to the lender of the existing loan, is entitled to a reduction in the total cost of the credit, equal to the amount of interest and costs due for the remaining life of the contract. The amount of the reduction is calculated based on the remaining time that would lead to the natural extinction of the loan itself.

It follows that the sooner the loan expires earlier than the natural maturity, the more the consumer will derive economic benefits, deriving precisely from the savings on residual interest (Article 125-sexies-paragraph 1).

Loan Debt Calculation

 Loan Debt Calculation

Before proceeding with the request for early repayment, the amount to be returned to the bank or financial institution can be calculated with this procedure:

  1. Subdivide the capital quotas and the interest portions of the residual debt (check the personal payday loan contract for this, which should contain a statement that indicates the financing situation at the end of each installment);
  2. eliminate interest and take capital only into account;
  3. add the amount of any penalty provided by the bank.

Lenders Indemnity (Loan Termination Penalty)

 Lenders Indemnity (Loan Termination Penalty)

The lender (banking or financial institution) is entitled to compensation from the consumer who requests early repayment of the loan, fair and objectively justified for any costs directly linked to early repayment of the credit. (Article 125-sexies-paragraph 2)

Criminal Calculation of Extinction and Debt Residual Loan

 Criminal Calculation of Extinction and Debt Residual Loan

The compensation to which the lender is entitled must be calculated so that it cannot, in any case, exceed the amount of interest that the consumer would have paid for the remaining life of the contract.

Furthermore, for the calculation reference should be made to the legislation that establishes that:

  • The value of the indemnity cannot exceed 1% of the amount repaid in advance (the so-called “residual debt”), if the residual life of the contract is longer than twelve months
  • It cannot exceed 0.5% of the same amount (residual debt) if the residual life of the contract is equal to or less than 12 months.

Cases where the penalty of extinction is not paid

 Cases where the penalty of extinction is not paid

The legislation (Legislative Decree 141/2010 – art. 125-sexies – paragraph 3) also provides a list of areas and cases in which the consumer who extinguishes the loan or loan by repaying it early will not have to pay the penalty of extinction, ie the compensation of the lender.

The penalty of extinction is not paid if:

  • early repayment is made in execution of an insurance contract intended to guarantee the credit;
  • the early repayment relates to a credit agreement;
  • early redemption takes place in a period in which an interest rate expressed by a specific fixed percentage predetermined in the contract is not applied;
  • the amount repaid early corresponds to the entire residual debt and is equal to or less than ten thousand euros.

The Text of the Law on Early Extinction

The full text of the Legislative Reference – legislative decree n.141 of 13 August 2010, published in the Official Journal n. 207 of 4 September 2010 – Suppl. Ordinary no. 21.

Art. 125-sexies. Early repayment
1. The consumer can repay the amount due to the lender in advance at any time, in whole or in part. In this case the consumer is entitled to a reduction in the total cost of the credit, equal to the amount of interest and costs due for the remaining life of the contract.

2. In the event of early repayment, the lender is entitled to fair and objectively justified compensation for any costs directly linked to early repayment of the credit. The indemnity cannot exceed 1 per cent of the amount repaid in advance, if the residual life of the contract is more than one year, or 0.5 per cent of the same amount, if the residual life of the contract is equal or less than one year. In any case, the compensation cannot exceed the amount of interest that the consumer would have paid for the remaining life of the contract.

3. The compensation referred to in paragraph 2 is not due:
a) if the early repayment is made in execution of an insurance contract intended to guarantee the credit;
b) if the early repayment relates to a credit agreement;
c) if the early repayment takes place in a period in which an interest rate expressed by a specific fixed percentage predetermined in the contract is not applied;
d) if the amount repaid early corresponds to the entire residual debt and is equal to or less than 10,000 euros.