It sounds a bit absurd at the first hearing: save money with a new loan – so new debt? But, in fact, debt repayment is a very appropriate tool for a borrower to reduce their debt and get new financial slots every month. The condition is, however, that the rescheduling must be done right: A more expensive loan is replaced by a cheaper credit – only then it actually comes to savings. This may seem obvious at first glance, but in fact it is often not that easy to determine whether a new loan is actually cheaper.
it debt” at a glance:
- Over time, the creditworthiness of a borrower changes. Accordingly, a loan becomes more expensive or cheaper for him. This can become a factor if an older and too expensive credit already exists.
- The claims regarding consumption and one’s own home as well as the general life situation (family) are also subject to change
- The repayment of a loan can release funds monthly that can be reinvested to meet the increased demands
- Moreover, the repayment of a loan is often in the interest of the banks: If a borrower is insolvent, it becomes a burden for the respective financial house. Accordingly, it can come to a modest debt rescheduling to avoid bankruptcy
But what options are there when you are looking to repay a loan? We dedicate ourselves to this topic in more detail!
Introduction: A Borrower – But Different Loan Contracts?
Again and again comes from interested in a loan, the question of how it can be that a borrower gets loans on very different terms. After all, it is always about the same person. Basically, there are two reasons for this: On the one hand, the economic conditions are changing. For example, since 2011, banks have a strong interest in lending because they rely on revenue. For this reason, interest rates have fallen sharply.
On the other hand, it is also up to the borrower himself. Let’s take a look at a normal life cycle: You may get a loan from 18 years. Decisive for your conditions are the creditworthiness (credit repayment ability) and the purchasing power (how much money do you have left monthly to buy things?). At 18, you are in education, still in school, working in low-paid jobs or studying already. Whichever variant applies, you probably do not have much money available. Granting a loan to you is a risk accordingly. Banks demand high interest rates to offset the risk.
Now, however, you are getting older, have completed your education, finished your studies and work. They earn regularly – possibly very well. Accordingly, the risk of giving you a loan decreases. Your conditions will be better.
However, you will get worse afterwards – at least as a rule. They start a family, want to buy a property or have already done so and have to provide for children. Your financial situation is getting worse. Accordingly, you are a much less welcome borrower at your bank. If the children leave the house, your financial situation improves again – you get a better credit. However, if you reach retirement age, this process is reversed again, because most people have less money available for retirement. However, at this point in time, there is the statistically significant risk that you will die from your loan before complete repayment.
Thus it can be shown that during a life an average borrower can get very different loan contracts. It often happens that you still have to struggle with a bad credit, although you could have a better one long ago.
Plan the debt restructuring: Make a financing plan
Anyone who could have a cheaper loan, in fact, pays too much each month. This money is lacking to save it, to invest or simply to enjoy life, to consume. Now the reposting becomes relevant from the old loan. Hereby the borrower takes up the new loan and pays off the old one. Accordingly, he can now benefit from the good conditions.
However, it is first necessary to check whether the new conditions are really better. For this you should create a financing plan. Simply put, you can figure out what the reposting means for you and your finances. Frequent mistakes are avoided: Often the interest on a new loan is, for example, cheaper, but the term is longer – absolutely it costs more.
In addition, the early repayment penalty is often forgotten: for early repayment, the previous bank may claim one percent of the balance of the loan as compensation if the contract runs for more than one year. Under one year, the prepayment penalty is 0.5 percent. Important: Real estate loans are excluded. Here, the banks can still set the value themselves. You, as a borrower, should review it before you begin your financing plan.
A very simple example to show how this works: You have 2000 euro remaining loan and another one year loan term. The interest rate is five percent. You have to plan accordingly for the year 2100 euros. Monthly, these are 175 euros.
Another bank lends you the 2000 Euro at two percent interest. There is also a one-off prepayment penalty. They pay 2060 Euro. Monthly, this is 171.67 euros. They gain a little financial leeway each month.
Signature for a loan on a loan agreement
The example illustrates some important lessons for the debt: The higher the loan amount, the more lucrative the debt becomes. The identical finding is to be levied for how long the loan is still running. If the loan has a long residual maturity, the debt becomes better and better for you as a borrower.
However, for your financing plan, you really need all the costs associated with the repayment of the loan. Especially when, for example, a credit intermediary has been involved, there may be some hidden fees and charges that can cause problems. Clarify in any case early!
Goodwill, costs and fear of loss: The rescheduling makes sense for the lender
The benefits of debt restructuring for you as a borrower are obvious. But for the lender too, rescheduling often makes great sense, which is why you often receive a corresponding offer from the house from which you received the original loan.
On the one hand, a bank often makes a corresponding step out of goodwill: before the repayment of the loan bursts, it is better to reduce the burden on the loan to something bearable for you. The repayment is a very elegant option for this.
Secondly, it often comes at a cost to the lender if he does not offer you a cheaper loan. You owe it anyway. The lender runs the risk of losing you as a customer. One percent early repayment penalty does not provide adequate compensation. As an extreme example: It is better for the bank, if you pay only two instead of three percent interest in the future, if the alternative is that the money house otherwise receives only one percent.
In addition, there is something of a loss-anxiety on the part of the bank: many customers are very critical if your lender does not help you with a rescheduling and leave the financial institution completely as a customer. Checking account, savings, etc. are deducted. Reconciling debt is also a means for the financial institution not to lose you as a customer.
According to experience, the impending insolvency is the moment when lenders become extremely accommodating. Here is the motto that is to be saved, what can still be saved. You should definitely talk about the debt repayment at such a moment.
Debt Credit: Both sides benefit
In conclusion, the following can be said: If you recalculate a loan, both sides will benefit. As a borrower you get new financial leeway or escape insolvency. The lender on the other hand prevents a repayment from bursting, that he loses a customer or he manages to win you back as a client. For this reason, you as a borrower should not be averse to any rebuke if you are a debtor to inquire. For the other side too, this process is a very attractive idea. However, you must not forget the golden rule: you must be sure that the new loan is really cheaper than the old loan!