Replacing a loan is a tempting solution to financial constraints given low interest rates. However, it should be noted that the pure interest rate does not yet include the expected final amount. This is composed of several factors. The replacement itself is not free and must therefore be taken into account.
All facts about the guide “Replacing credit early” at a glance:
- In the event of early loan repayment, the remaining debt is to be settled with a single final payment.
- Whether a new contract can be concluded or a renegotiation of the conditions can take place and is dependent on the goodwill of the credit provider.
- For objective evaluation, the following criteria must be taken into account:
- the period,
- the amount of the installment,
- the repayment installments in the case of repayment loans,
- the interest payment and
- compound interest effects
1. What does it mean to replace a loan?
Basically, there is not much behind this name: The loan is not yet fully paid off, but the loan agreement – mostly overpriced conditions – should be terminated. This desire of borrowers accumulates with falling market rates.
Premature repayment of loans
Here, however, there is a problem. The banks have included price fluctuations in their calculations. At times of higher market interest rates, they leave the low interest rates in favor of the borrower and at times of low market interest rates they leave the relatively higher interest rates in their own favor. Give and take, so to speak! If all borrowers now come up with the idea of replacing their old loans with higher interest rates with new loans with lower interest rates, sooner or later banks will lose money. This is to be avoided in the interests of all parties. Therefore, you can not even replace a loan.
The financial institutions demand so-called prepayment penalties to compensate for the resulting economic damage. In principle, they have every right to do so. The contract is finally terminated without real reason and replaced by a loan with more favorable terms. Finally, homeowners are not allowed to terminate their tenants to collect rents from the highest bidder. But what is strictly regulated in tenancy law, works in the financial sector on the payment of fees.
2nd renegotiation or new contract?
Of course it is tempting: The banks are luring with loans with an effective yield of less than 5 percent! Ten years ago you yourself closed a loan with a sensational 8 percent. But pride in his own negotiating skills fades in the face of low interest rates.
Options to replace a loan early
In principle, contracts can always be renegotiated. It is never wrong to look for a conversation with the bank adviser. Even in the case of online loans, at least the communication and renegotiation can be tested by means of email traffic. In case of doubt, personal consultations by phone, at home or in a branch are certainly possible. Before the frustration in the face of possibly considered too low concession leads to ill-considered decisions, you should inform yourself about all follow-up costs in advance. As already mentioned above, the lenders are entitled to claim so-called prepayment penalties.
These prepayment penalties may be so enormous that it is no longer worthwhile to repay the loan. In § 502 BGB the maximum height is exactly regulated. Up to one year before the end of the term, the compensation may not exceed 1 percent of the premature repayment amount. Within the last year, 0.5 percent of the outstanding amount may not be exceeded. The conclusion of a new contract can also bring a closing fee. Also, the question is how much confidence the new bank has in the borrower if the credit agreement has been previously terminated. Therefore, it is quite possible that in this case the termination conditions are already tightened in the contract.
Whether rescheduling or new contract depends on the conditions, conditions and circumstances. These must be carefully checked in advance in order to avoid possible overriding. Basically, this is also a balance of advantages and disadvantages.
3. These values must be taken into account
The most important values here are the term, the amount of the installment, the repayment installments in the case of repayment loans, the interest payment and compound interest effects. It helps to make a tabular list in order to make the different loan conditions clearer.
The term is directly related to the amount of the installment. These must both be in realistic, comprehensible areas. Too high installment payments lead to shorter terms, but at the same time mean a greater rejection of consumption in everyday life. While lower installment payments are more enjoyable in everyday life, in most cases they are associated with higher total return. If the interest rate is possibly constant, the duration of the loan agreement will cause interest payments to accumulate over a longer period of time and, consequently, the overall effective interest rate to be higher.
Depending on the type of loan, payments may vary over time or remain constant. Here is a precise financial plan from the lender helpful, so as not to get confused with their own bills. Furthermore, special conditions must be taken into account. In view of the often dynamic life course, changes to the credit agreement must also be taken into account. If change flat rates, service and processing fees are already factored in, this is an advantage. Otherwise, these costs should be asked and planned realistically.
Relevant values for comparing loans
After successful research, the values can be listed in a table and the amounts summarized. If another loan, taking into account all special payments, has a lower total amount, the prepayment penalty must be added here and compared with the actual loan.
4. The conclusion: the final amount should make the decision
In addition to rational decision-making, subjective decisions play a crucial role. This does not just mean gut feeling and sympathy towards banks or bank advisors. Much greater influence has the personal well-being. Because there are different types of debtors. Some want to get out of the loan agreements as quickly as possible and prefer short maturities. They feel the idea of their own bank account as unpleasant and want to conquer their mountain of debt as soon as possible.
Others want to consume while debt repayment and therefore prefer the lowest possible rates. Debt is less depressing and they continue to boost the economy thanks to their unchanged consumer behavior. Still others want to pay as little as possible for borrowing money. Their behavior towards money is rational and their only aim is that the return should be as low as possible in the end. They keep a cool head just when price fluctuations and can not be carried away to short-circuit reactions.
If you have developed your own credit model for yourself and, if necessary, in consultation with the partner, the above data can be obtained and compared by all potential lenders.
A table compares the most important criteria
In the end, then the final amount should make the decision. In the case of a bill of exchange, this also includes the prepayment penalty and thus indicates the actual amount to be paid at the end of the repayment term. In this way, even critical borrowers, who sense an impending debt trap behind every offer, can make an objective judgment.