Glossary: Early redemption charges
You may think a lender would be grateful to you for paying off your debts early. Alas, no. Mortgages and loans levy early repayment (or redemption) charges because the profitability of your loan or mortgage to the lender is calculated on the basis that you’ll pay every payment (see APR). To pay the loan/mortgage off early – even to remortgage – means the lender will make less profit and so claws back potential lost profit with an ERC, which could be three months’ interest. The earlier into the term you repay the loan, the higher the ERC might be.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.