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A Beginners Guide To Early Redemption Charges

By: James Miller

An early redemption penalty is a penalty that you will need to pay when you cover the borrowing, such as a mortgage or loan, before the arrangement is finished. When trying to get credit, it is reasonable to take a close look at the early redemption clause. That way you can know how much money you could obligated for if you plan to satisfy the lending before the end of the contracted term.

Before we begin, here is a range of the common terms you will come across in regards to this topic. An arrangement fee is something that is presented to you by a lender or broker when you take out lending such as a loan or mortgage. This is a means to recover their administrative costs in setting up the borrowing. A few loan providers will do this completely free trying to entice new clients.

A tie in period on a property mortgage stipulates you are legally bound to the mortgage company for a specific time period. How it works is that the mortgage company will offer you a favourable deal, for example, a fixed rate mortgage loan for the first two years. Though you could be bound to the mortgage company for a specific term. following, for example a year, during which you must pay their standard variable rate. This is a method for mortgage companies to get back money they forfeited in letting you have a great deal, for the first two years. When you choose to switch mortgage providers during the 'tie in' agreement, they will charge you a penalty which may add up to thousands of pounds.

When looking at borrowing money, you'll no doubt be aware of the old saying 'Shop around for the best deal'. However, while shopping around is the best thing you can do to find the right finance deal, don't just look at the annual percentage rate (APR) on the loan - otherwise you could end up being ripped off by an early redemption penalty.

An early redemption charge (ERC) has many different names - early redemption clause; early repayment penalty; early termination penalty; early redemption fee; financial penalty; and, redemption charge/penalty. However, what it is remains the same. Basically, should you repay your loan early, you may find that you have to pay an early repayment penalty.

If you have a personal loan, the charge may be typically one or two month's worth of interest. However, it is for a mortgage, this figure could literally run in to thousands of pounds, depending on your mortgage agreement.

With the latter, many mortgage companies offer special deals for a set period of your mortgage - for example, for the first two years. So for two years, you are getting a really good deal, probably at discounted rates. However, when it gets to year three and your lender wacks up their interest rates, naturally you will want to look around for another mortgage deal.

However, if you look at your mortgage agreement, you may see that you are tied to the lender for, say, four years. So, in that way, he can make a lot of his money back from you in years three and four.

If you decide to switch to a better deal in year three or four, then you may face an early redemption penalty.

So, how can you stop getting ripped off by lenders charging this fee? First of all, don't take out any loan agreement until you have thoroughly checked out whether there is an early redemption fee.

Any early termination fees should be explained to you before you take out a mortgage. If you are not made aware of any such fees before you agree to the loan, then you should seek legal advice as this is miss-selling
.
However, if you are made aware of the charge and it seems like a reasonable fee and you are happy with the rest of the deal, then go for it.

If it doesn't look right or the charges look a bit unrealistic, then do not proceed. There are plenty of lenders out there who do give personal loans and mortgages without any 'tie-ins'. So, shop around.

Article Source: http://articles.directorygold.com

James Miller has various insightful and significant articles that give very insightful information not just about remortgage quotes online but also others about urgent tenant loans and bad credit guaranteed loans.

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