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Consumer Rights and Early Loan Repayment

In loan agreements covered by European Legislation a consumer has the right to early repayment of a loan.

What is the Right to Early Repayment?

The right to early repayment is the right of a consumer to repay a loan before the agreed deadline without being charged the additional amount he would pay in interest had he repaid it within the agreed deadline.

Example:

A consumer borrows the amount of €50,000 with an annual interest rate of 5%. It is agreed that the amount will be repaid with  monthly instalments amounting to €530.57 until repayment. This means that the loan will be repaid in ten years from the date of receiving the loan. In total, the interest rate payable until repayment is €13,668.

When does this Right Exist?

There are two types of credit agreements in which the right of early repayment/repayment is allowed. These credit agreements are based on European Directives.

Consumer Credit Contracts that do not concern Real Estate

The first type of credit agreements are agreements not secured by a mortgage, or which relate to the acquisition of real estate, construction of a building or which are for more than €75,000 (unless they relate to unsecured credit agreements for property renovation) or credit agreements for less than €200, or hire-purchase agreements as well as some other contracts. Such agreements are covered by Law 106 (I)/2010 on Consumer Credit Contracts Law of 2010.

The right of early repayment in relation to the first type of contract provides that in the event of early repayment, the creditor is entitled to compensation not exceeding 1% of the portion of the credit repaid early where the period between early repayment and the agreed maturity of the contract exceeds one year and 0.5% of the price of the credit where this period does not exceed one year.

Where the amount of the early repayment is less than €10,000 in any period of 12 months, then the creditor cannot claim compensation for early repayment.

Consumer Credit Contracts in Relation to Real Estate

The second type of contract in which the consumer has the right to early repayment is where the credit agreement relates to real estate intended for residence. These contracts should be secured by a mortgage or other similar security and relate to real estate intended for residence or credit agreements whose purpose is to acquire rights to land or buildings. These contracts are covered by Law 41 (I)/2017 on Credit Contracts for Consumers in relation to Properties intended for Residence Law of 2017.

In this type of contract, the creditor is entitled to compensation for early repayment which is calculated on the basis of a specific mathematical formula. The creditor may also claim any administrative expenses related to the early repayment, which cannot exceed €100.

This article has been prepared by the Cyprus Consumer Center for Alternative Dispute Resolution and is co-financed by the European Union under the Consumer Program (2014-2020).

The Cyprus Consumer Center for Alternative Dispute Resolution is a Body approved by the Consumer Protection Service and notified to the European Commission.

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