Anyone who took out a loan five or ten years ago is unlikely to stop getting annoyed given the current (2018) low interest rates on the market. Both classic installment loans and mortgage loans for the purchase of a property are considerably cheaper today than a few years ago. As a borrower, you hear very quickly that you can still reschedule the loan. This would save interest and make financing much cheaper. At first glance, such an offer of course sounds attractive. But if you want to reschedule a loan, you should get detailed information, because it doesn’t always make sense to redeem a loan early. So what do borrowers need to look out for?
How do debt restructuring and follow-up credit differ?
First you have to know that a debt rescheduling and a follow-up loan do not describe the same business transaction, although both terms are often confused or used with the same meaning.
A debt rescheduling is when a current loan is replaced by other financing before the end of the term. The reason for this is usually a lower interest rate at another bank. A follow-up loan is the conclusion of follow-up financing at the end of the borrowing period. If, for example, a mortgage loan with a fixed interest rate of ten years is taken out, the financing is usually not yet fully repaid after these ten years. Therefore the loan must be extended. This extension is possible with today’s bank, but you can also switch to another bank. Debt rescheduling and loan repayment can therefore be clearly separated.
With which loans does a debt rescheduling work?
In principle, early repayment of financing is possible with a classic installment loan as well as with a mortgage loan. So even if you have completed construction financing to buy a property, rescheduling can be an option. However, not every bank allows early redemption on more favorable terms. Anyone thinking about repaying a loan should read the loan agreement carefully and contact the financing bank if necessary. The best thing to do is to ask by telephone whether debt restructuring is in question and whether it would be approved by the bank. Ideally, you also request the current account balance, including the accruing interest. So you have a solid, calculated overview and know exactly what amount is to be repaid. The sum of the remaining debt, prepayment interest and processing fees then results in the loan amount for the new loan.
What is the prepayment interest rate?
A bank is entitled to request interest for the early redemption of a financing. In this context one speaks of the prepayment interest. They represent the loss of interest loss that the bank suffers because financing was repaid early before the contract expired. This loss of interest is naturally offset by the lower credit default risk, because the early repayment means that the bank no longer has the risk that the loan will not be repaid in accordance with the contract. The layperson’s exact calculation of the prepayment interest is usually neither transparent nor understandable for the layperson.
As a guide, the longer the remaining term and the higher the interest on financing, the higher the interest rate. For a loan with a remaining term of 12 months, there is less prepayment interest than for a loan with a remaining term of 36 months. A loan with an interest rate of three percent is more expensive to pay off than a two percent loan. If you want to know exactly how high the prepayment interest is likely to be, use an online calculator. This determines the anticipated prepayment interest and at the same time checks whether the bank is making a serious offer. If you have the feeling that interest rates are set too high, it is worth checking by consumer protection. It can provide valuable information as to whether one has to accept the bank’s demand or whether there is still room for negotiation.
When is debt restructuring worthwhile?
As a consumer, one can use the guideline as a guide that rescheduling only makes sense if the new monthly loan rate is significantly cheaper than the old rate or if the new loan is repaid much faster than the old one. If you want to make a well-founded assessment and not just rely on your gut feeling, it is best to take the new loan amount from the remaining amount, prepayment interest and processing fees and use this loan amount to carry out a loan comparison. A debt rescheduling brings financial benefits if, according to the offers in the comparison calculator, the credit rate is cheaper than the old rate for the same term. If the comparison calculator shows an identical credit rate, the contract term should be much shorter. You can also compare the sum of the remaining debt and interest very well. If it is higher with the old financing than with the new loan, this usually speaks for rescheduling on better terms.
What needs to be considered with mortgage loans?
If you want to reschedule real estate financing, you have to take some special features into account. Since a mortgage loan is usually a large sum, the financing bank requires protection. A mortgage is entered in the land register. If the borrower falls behind with the payment of his installments, the bank is entitled to request the sale of the property in order to repay the mortgage from the sale price.
The mortgage is therefore the security for the bank that it will get the financed money back. If a mortgage loan is transferred to another bank, the entry in the land register must also be changed. The new bank is then to be entered as the beneficiary and the mortgage on the old bank is to be deleted. This change to the registration is usually subject to a fee and it can take a long time to complete. If you want to reschedule a real estate loan, you should keep this in mind and add the cost of the change to the prepayment interest and processing fees.
How do you find a cheap loan?
The quickest way to find financing on attractive terms is to use a credit comparison calculator. There are good comparison calculators on the Internet, they can often be differentiated according to the classic installment loan and a mortgage loan. For a first overview of the current conditions, only a few data are sufficient, which have to be entered into the online calculator.
Little data is enough for a first overview
A credit comparison for a classic installment loan is best carried out by entering the desired loan amount and the preferred term. Based on this information, the comparison calculator compiles a compact overview of all banks that are interesting for this financing. The output of the comparison calculator can usually be filtered and sorted according to several criteria. You can get a quick first overview of the best conditions if you sort by interest.
This way you can immediately see which bank offers the lowest interest rate. If additional criteria such as an immediate total repayment or special payments without additional costs are desired, you can filter according to these characteristics. Most of the time, the supply of the banks in question is reduced a little because not all loans meet these requirements. If you have selected one or two favorites for debt restructuring, it is worth taking a look at the detailed conditions.
When it is worth taking a look at the small print
From the credit comparison calculator, it is usually not possible to immediately see how a bank calculates its interest and how likely it is to actually get the loan interest offered. Often, the interest rate in the credit comparison calculator is only an indication that applies to customers with very good credit ratings. If you have a high income and no further loan obligations, you may be lucky enough to really get this attractive interest.
If the borrower’s creditworthiness is assessed somewhat poorly, higher interest rates may have to be expected. Perhaps the borrowing costs are also varied according to the length of the term, or they fluctuate depending on the loan amount. You can only find out such details if you compare the small print. These detailed terms are quite interesting, because it may well be that on closer inspection something changes in the original preference of the borrower. Therefore, you should only make the final decision for a specific bank if all conditions have been checked in detail and if the new provider really presents a contract for debt restructuring that offers optimal conditions.
What happens after the choice of the provider?
If you have chosen a specific bank, you can initiate debt restructuring directly. A credit inquiry is often started directly from the comparison calculator. To do this, the applicant must submit certain documents, such as a current proof of salary. With some computers you can state that it is a debt rescheduling. The loan request then goes directly to the bank, where it is checked and sent to the borrower with a final offer.
If the borrower agrees to the terms, he signs the offer and contract and sends the documents back to the bank. When rescheduling, you can often agree with the transferring bank to transfer the amount directly to the old lender. This saves you from having to go through the borrower’s checking account. As soon as the remaining debt has been paid, the bank sends a confirmation to the borrower. The new financing then begins on the agreed date, which is usually set at the beginning of the following month. From this point on, the borrower pays the new installment for his rescheduled loan.