A loan to pay off existing liabilities leads to significant savings with lower interest rates on the new loan. The precondition is that the borrower does not have to pay high prepayment interest for his current loan agreements.
At any time and always repayable are credit lines such as the discretionary credit, an available credit and the balance of a credit card. For consumer credit, early repayment is generally possible, but the credit bank may charge prepayment interest unless the credit agreement provides for special unscheduled repayments. For real estate loans, special repayments can be excluded during the first ten years of the contract.
Several banks offer special debt rescheduling loans with reduced interest rates compared to non-earmarked consumer credit. These are of course cheaper than a simple loan from the same bank. Whether they are also cheaper than the offers of other credit banks, shows a credit comparison. On the other hand, it does not make sense to accept the special loan to pay off the current liabilities without making comparisons with the conditions of other banks, which may be tempted by the interest reduction being raised.
Do all existing loans have to be replaced?
Whether borrowers need to consider all existing loans for a loan to pay off existing liabilities differs depending on the financial institution. Most banks refrain from including a possible real estate financing, especially as their early repayment was often excluded by contract. Often, debt holders may also refrain from taking out other preferential loans such as a car loan or an interest-free installment while integrating all other loans into the new contract. Few financial institutions give their clients the option of repaying only part of the non-discounted current loan on a loan to pay off existing debt.
Disposition loans, availability credits and debits of credit card accounts are not linked to any fixed repayment obligations. Not all banks require their involvement in a loan repayment. However, this is always advisable due to the high lending rates for flexible credit lines.
The course of a loan repayment
The new bank does not transfer the loan to replace the existing liabilities to the current account of the customer, but as far as possible directly offsets existing credit accounts. This approach prevents the borrower from using the new loan to repay existing borrowing, as indicated. Without this certainty, the credit bank would have to carry out its budgetary account with the rates of the new loan and the previous liabilities.
The direct replacement of the credit card account balance by the new lender is not always possible because individual issuers reject incoming payments by third parties. Furthermore, the portion of the repayment loan determined for the purpose of offsetting the current account and a possible increase in the bank account of the customer.
A small increase in credit is almost always associated with a loan to repay expensive old loans, as most financial institutions lend exclusively on flat 1000 euro amounts. Many borrowers associate debt rescheduling with an additional loan over the rounding amount.
Find the appropriate new loan
Before applying for a loan to pay off their existing debt, applicants check whether they are actually making significant savings. In a few cases, borrowers replace an existing loan, not for cost reasons, but because of a desired reduction in the monthly loan installment by extending the term. This makes sense if the previous credit bank rejects the desired change in the repayment plan.
The replacement of existing loans serves to save interest costs. If the credit rating of the lender has deteriorated after the conclusion of the existing credit agreements, a rescheduling is economically not usually useful. A loan without private credit or – which is possible with some domestic banks with a soft negative feature – despite a private credit negative feature is usually associated with a higher interest rate than the old loan and therefore advisable only in those cases in which the applicant on a mandatory Loan is instructed. This is not the case with a loan repayment, as the lenders are allowed to cancel installment loans only in case of improper repayment. Any necessary credit increase in this case is most likely possible through an organized personal loan.
In a savings calculation, the borrower checks whether the future interest savings are higher than the prepayment penalties to be paid. The prepayment interest payable on early loan repayment is the easiest and most reliable way for bank customers to obtain it from the bank.
The loan for replacing existing loans is ideally not only cheaper than the previous loan, but also associated with a flexible repayment. The right to premature special repayments allows a new loan repayment if interest rates continue to fall during the term. The possibility of an annual or biennial installment break or the contractually agreed right to amortize the loan at the request of the creditor makes it easier to meet the repayment obligations in the absence of income or additional expenses. The ideal loan for repaying existing liabilities combines a low effective annual interest rate with extensive loan repayment flexibility.