Janice has a loan of €3,000 on a variable interest rate from Sofas-R-Us. Janice decides to repay her outstanding obligations early under this credit agreement. As a result Sofas-R-Us should :

• A. allow Janice a reduction in the total cost of the credit.
• B. report Janice to the Irish Credit Bureau.
• C. refund all initial charges related to granting the credit.
• D. seek reasonable compensation for early repayment.

Answer: (A)

When a borrower pays off a loan early, the lender should reduce the total cost of the credit because interest would no longer accrue for the remaining term. The outstanding balance is settled, future interest stops, and the borrower benefits from the lower cost of borrowing. That’s why the appropriate action is to allow a reduction in the total cost of the credit. Reporting to the Irish Credit Bureau isn’t triggered by early repayment, and refunds of initial charges aren’t automatic unless specified in the contract. Seeking compensation for early repayment would only be appropriate if the agreement includes a prepayment penalty, which isn’t assumed here. The core idea is that early settlement lowers what the borrower ultimately pays.