Banks Abolish Early Loan Repayment Fines

by Christopher Kiiza
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Customers who choose to pay off their bank loans ahead of schedule, or prior to the agreed-upon repayment period, will not be subjected to any penalties or adverse repercussions, the Ugandan Banks under their umbrella body, the Uganda Bankers’ Association (UBA) have resolved.

The communication is contained in a letter signed by UBA Executive Director, Wilbrod Owor to the Executive Director Supervision, Bank of Uganda, Tumubweine Twinemanzi.

“We write regarding the above subject matter, (Early Repayment Charge on Outstanding Loans) discussed at the Governor’s meeting with member CEOs on 23rd August 2023 and your follow-up letter of 12th September 2023, Ref EDS.714.2 on the same matter. This correspondence serves to notify you that at our monthly CEO’s meeting held on Friday 13th October 2023, a decision was reached to drop/abolish the practice of early loan repayment fees/charges on outstanding loans across our membership/industry,” Owor’s letter reads in part.

He added: “The meeting further agreed that BOU be notified of this decision with immediate effect and that members handle applicable communication to their customers as appropriate. We thank you for your stewardship and count on your usual support.”

Following Owor’s letter, the UBA Head of Communications and Corporate Affairs, Patricia Amito clarified that the change will take effect on December 1, 2023.

“The above change will take effect on 1st December 2023 in conformity with the minimum 30-day notice requirement for notification of customers by supervised financial institutions,” said Amito.

In simple terms, it means that if you borrow money for a certain period of time, such as 12 months, and you pay it back early, such as after 6 months, you will not be charged a fee for doing so.

The practice has been a subject of public outcry and criticism from consumer organisations as well as the central bank, arguing that this increases the cost of borrowing.

The decision to halt early loan repayment fees is aimed at facilitating the loan market with flexible options and alternatives in constraining economic circumstances and by extension contributing to the growth of private sector credit.

This can be a great feature for borrowers who want to have the flexibility to pay off their loans early if they have the extra money. It can also save you money on interest, since you will be paying off the loan for a shorter period of time.

Why Do Banks Reject Early Loan Repayment?

Among the reasons why banks reject early loan repayment is lost interest income. Interest income is one of the main ways that banks make money. When a borrower takes out a loan, they agree to pay back the principal amount of the loan plus interest over a set period of time. The interest rate is a percentage of the principal amount of the loan, and it is determined by a variety of factors, including the borrower’s credit score, the type of loan, and the current economic conditions.

When a borrower pays off a loan early, the bank loses out on the interest that they would have earned over the remaining life of the loan. This can be a significant loss of revenue for the bank, especially for large loans such as mortgages.

It is important to note that prepayment penalties are not always fair to borrowers. Some borrowers may need to pay off their loans early due to unforeseen circumstances, such as job loss or medical expenses. In these cases, charging a prepayment penalty can be a financial burden on the borrower.

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