When people look for loans these days, they pay more and more attention to the APR. This is not surprising, since the APR was created to give customers a standard number they could use to compare the prices of different loans without having to get out their calculators and do the math themselves. But there are many other costs that could come up if you take out credit, and it would be a mistake to ignore these and only focus on the APR.
The early redemption charge or penalty can become one of the most important fees. These are fees that are written into a loan contract and are charged to the customer if they want to pay back the loan early. The ability to pay back a loan early is probably the most important flexible feature of all credit, because it means you can use extra money to pay off the loan early. Since interest is based on how long the loan is still open, you could save hundreds or even thousands of pounds in interest charges.
Any type of loan can have early payoff fees, except for credit cards and overdrafts, where you can always pay off the balance whenever you want. However, they are most important when it comes to mortgages. Many people buy homes with the idea that they will only live there for a short time, like a year or two. Many other people may find that they have to move sooner than they planned, like if their family has grown or if they get a new job. Young people and first-time buyers should plan for these possibilities, and they should think carefully about early redemption fees before taking out a new mortgage.
Many mortgages won't have penalties for paying off the loan early. This is a good choice for people who think they might want to pay off their loan early. But early redemption penalties are pretty common with discount mortgages, which give you a lower rate of interest for a set amount of time, usually two years. A typical example is a mortgage that has an early redemption penalty of 2% for the first year, 1% for the second year, and 0% after that. These fees may seem fair, and in most cases they are, but think about what would happen if a couple took out a £100k mortgage and then had to move within a year. They will have to pay a fee of 2,000 pounds for getting out of the deal early. Most people would probably want to avoid this.
