What do you have to consider when repaying a loan?
A loan is repaid if existing loan contracts are replaced by a new loan during their term. In most cases, the replacement of existing loans involves a change of lender. It is also possible to choose a credit product other than the current one from the previous bank.
What are the reasons for early loan repayment?
The main reason for early loan repayment is that the loan agreements currently in use are associated with significantly higher interest rates than the new loan. When calculating the interest savings, it should be borne in mind that early repayment of existing loans often requires prepayment penalty, so that this must be deducted when calculating the actual savings. Consumer loans often provide for the possibility of free early repayments, but the financial institution may not pay the borrower a pro rata amount in this case. Another possible reason for a loan repayment is that the borrower is dependent on lower monthly installments and the new loan offer provides for this. If the reduction in the monthly charge is based solely on a longer loan term and not also on a lower interest rate, it is advisable to contact the previous lender for a term extension before rescheduling. Credit institutions specializing in the issuance of redemption loans also advertise the advantage of being able to process the entire repayment through a contractual partner after a combination of several current loans. However, since credit contractors debit the monthly installments anyway, the pooling of liabilities does not result in any noteworthy labor savings, so that a loan replacement is not expedient simply because of the reduction in contracting parties.
Do all existing loans have to be repaid?
As a prerequisite for the approval of a redemption loan, some financial institutions require their customers to reschedule all existing installment loans. Any additional existing real estate financing is generally not included in a loan summary. Unless the new bank insists on including all loans, consumers with low interest rates, such as car loans or an installment payment agreement with the dealer, will not include them in the loan. The consideration of the overdraft facility used as well as the inclusion of the credit line used on a credit card account makes sense in any case, since the interest to be paid is above average.
The practical approach to loan repayment
The borrower expressly states in the loan application that he wants to use the desired loan to settle existing liabilities. This information is important for the bank’s household accounts, since its new customer does not have to pay the due rates in addition to the previous credit rates, but instead of these. For organizational reasons, it is customary for a loan intended to repay existing loans not to be paid into the borrower’s bank account, but to the currently existing credit accounts. This measure also ensures that the borrower actually repays existing debts and does not take out an additional loan contrary to what he stated in the loan application. In individual cases, it is not possible to transfer the prorated transfer amount directly to a specific account, since the credit agreement excludes incoming payments from third parties. In this exceptional case, the transfer lender transfers the corresponding part of the loan to the customer’s checking account. This also applies to the amount intended to settle the overdraft facility.
Special case real estate loan (redeem mortgage loan prematurely)
Due to the loan security provided by the property being financed and the associated low interest rate, the replacement of existing building finance is only sensible with another real estate loan. A property that has already been paid off can be used as collateral in the context of an early loan repayment and mortgaged again. In this case, the consumer makes significant savings over their current installment loans. The only restriction is that not all financial institutions lend real estate for purposes not related to it. The option of agreeing variable interest rates does not make sense if an existing loan is repaid, since this does not offer the credit customer any planning security. Instead, attention should be paid to the longest possible fixed interest period. Any existing real estate loan contracts with variable interest rates can be terminated free of charge at any time.
Compare financing offers and stay consistent
Before entering into a loan agreement to replace existing liabilities, consumers make a careful loan comparison. They pay particular attention to the effective annual interest rate and the options for flexible repayment. Some financial institutions issue redemption loans at a slightly lower interest rate than new loans. After consumers have included their existing credit lines in the current account and on a credit card account in the loan repayment, they are immediately available again in full. However, long-term interest savings can only be achieved if account holders take care not to use their credit limits again immediately.