What is Extraordinary Amortization?
Definition and definition
Ordinary repayment is made under the amortization plan agreed upon for the loan. For this purpose, a regular installment payment is agreed upon within a certain term. A extraordinary amortization means payments for repayment made through the agreed redemption plan.
Borrowing and special arrangements
In the case of borrowing, the general conditions for the terms of the loan agreement are communicated. The time and installments are included. The installments gradually pay off the credit. Changes in time schedules occur when installments are not paid, installments are increased or reduced, or suddenly the entire loan is replaced with a payment. An extraordinary repayment may lead to a total termination of the loan so that the contract is terminated before the actual maturity date. With a complete resolution, the borrower can finally free himself of considerable costs. Banks earn these costs, which are due in the course of time with a proper repayment.
In order to protect themselves against a loss of business, banks often agree on an early repayment, if the loan should be paid prematurely by way of a complete resolution. Every now and then, even maximum payment limits are agreed upon for a special repayment. These regulations make it easier for the banks to make a calculative forecast. For these reasons, the extraordinary repayment is also often referred to as "special repayment" because it exceeds agreed-upon repayment amounts in the amount. If the total liability is repaid with the extraordinary repayment, this payment is also called credit termination.
The redemption rules depend on the credit type
In the case of consumer credit agreements, for example, there are other credit rules than for real estate loan agreements. For example, a special repayment of consumer credit agreements is always possible. On the banks side, however, compensation payments are usually due which are intended to secure the bank's default.
In the case of real estate loans, an extraordinary redemption is possible if no interest period has been agreed. For special repayments, there are usually special agreements in the credit agreement, which stipulate a certain amount in a fixed period. After a special repayment, a reduction in the term or a shortening of the term may occur. A free full payment is advantageous if the interest rates for a new borrowing have been reduced and the borrower is bettered by the new borrowing of a loan.
In the case of unexpected money growth, for example as a result of an unexpected bonus payment, an extraordinary repayment of a loan with an exemption can be very useful. It provides the borrower with financial resources again to trigger new plans. If interest rates for borrowing have declined comparatively, the borrower can borrow a new loan at considerably better terms and save money. Ultimately, the possibility of a complete resolution of the loan from the concluded contract with its rules depends.
Compensation payments to the bank must also be observed. If the prepayment penalties for a complete credit resolution are very high, then it is computationally possible that a complete credit resolution with an extraordinary repayment is not worthwhile. In this case, it may be necessary to make a special repayment, which leads to a reduction in the term of the credit or a reduction in the installments. All options should be settled before a payment is made. If the extraordinary repayment is not worthwhile, it may be more appropriate to invest the money in a better financial investment. Costs and compensation should not negatively impact the unexpected increase in money.