So you owe your installment loan
- Check the terms of your current loan
Learn the key metrics of your existing loan. Specifically, these are the annual percentage rate of charge (most important criterion!), The remaining term (in months) and the monthly repayment installment. The necessary information is usually found in your repayment plan. If you do not have the appropriate numbers – ask your bank
- Calculate the prepayment penalty
Whether or not there is a prepayment penalty (penalty payment) and how high it is can vary from one loan to another. Check the terms of the contract to see what is going on in your case – or ask the bank. In any case, contracts concluded before 11 June 2010 have a three-month notice period.
- Calculate your remaining debt
Now you should calculate if and how much money you save by rescheduling a new loan exactly. For this, you need the key figures of your existing loan – that is, the annual percentage rate of interest, the remaining term in months and the monthly repayment installment. Here is a simple sample calculation.
If you have a binding loan offer that will save you money compared to your existing installment loan, do not delay, but take the opportunity. One option is to present the offer to your house bank and ask if it offers you similarly favorable terms for a rescheduling. In some cases, the bank will respond. However, if it does not suit you, then change the provider.
With a rescheduling you can replace your old, expensive loan under certain circumstances with a new, low-interest loan. Especially with mortgages, installment loans and credit facilities, this step can be worthwhile. Depending on the amount of your outstanding debts (“residual debt”), savings of a few hundred or, for larger real estate loans, even a few thousand euros are possible.
But note: Not every loan can be rescheduled without any problems. Unfortunately, if a loan is earmarked, such as a car loan, the reorganization will not work. Unless your old loan was for something specific, you can replace it with a new one. Mortgage lending is an exception here.
Why is a debt restructuring worthwhile?
We have already mentioned the first factor, why a loan remission is worthwhile – the lower interest rate level. According to Bundesbank figures, for example, the average interest rate for consumer credit with one to five-year maturity has fallen since 2010 from 5.67 percent to 4.77 percent. This comparison alone shows why debt rescheduling can pay off for you. A credit comparison can be very helpful.
In addition, there are two other effects that will benefit you.
- Normally, saving your debt repayment loan on a cheap online bank will save you a lot more than the lower average interest rates suggest.
- The shorter the term, the lower the interest. For example, if you completed your old loan six years ago, and that loan has a ten-year term, then a new four-year loan will be enough to reschedule your debt. This further lowers the interest rate.
That’s how much you can save by rescheduling
- Your old loan has a remaining term of 36 months. The annual percentage rate is 8.5 percent, the monthly repayment 400 euros. This results in a residual debt of 12,729.88 euros.
- A new provider offers you a loan on the required 12,729.88 euros at an annual percentage rate of only 6.5 percent. The term should also be 36 months.
- As a result, you save 393.07 euros with the debt restructuring. Even if there is still a maximum prepayment penalty of one percent of the remaining debt (€ 127.30), your savings will still be € 265.77.
Can I cancel my loan so easily and reschedule it?
For you as a borrower, rescheduling is an opportunity – it is a problem for your bank. Finally, the bank has calculated with the interest income for the entire term. If you repay your old loan to make a debt restructuring, the bank must re-invest the money by lending it a new loan. However, as the general interest rate has fallen, as described, the new loan will yield less income than the old one.
Of course, the banks know about this mechanism. In order to complicate the early rescheduling, they usually ask for a kind of penalty for the termination of a loan. The technical term for this is prepayment penalty. There are different prepayment rules for different types of credit.
Mortgage lending, for example, is subject to multi-year fixed interest. Replacing the loan during this phase almost never pays off because the prepayment penalty is too high. But if the interest rate lock expires, you do not need to pay any compensation. Accordingly, you can easily save a high three-digit or even low four-digit amount with a rescheduling.
In the case of installment loans, on the other hand, there is an important deadline to be observed – namely 11 June 2010. On that day, the European consumer credit line came into force, setting out the legal framework for virtually all consumer loans between 200 and 75,000 euros. For installment loans that have been completed after this date, banks may only demand compensation of up to one percent of the outstanding balance. Thus, the rescheduling often pays off despite the “penalty payment”. For contracts concluded prior to June 11, 2010, there are no legal limits. A rescheduling can therefore make sense for installment loans that were completed after 11 June 2010.
The new creditor must also be informed about the following points:
- What about your credit rating?
- What do you want to finance with the new loan?
In any case, your bank will check whether you have debts before granting loans. However, if the bank knows about its planned rescheduling, it is clear in advance that in the future a creditor will be eliminated. For this reason, it is important to inform the bank that the new loan will seek to reschedule.
Can I repost my credit line?
The credit line is actually there to compensate for short-term financial bottlenecks – until after a few days or weeks, the next salary transfer comes and noted the checking account again in plus. Sometimes, however, it happens that the debts pile up slowly and from a few hundred euros suddenly 1,000 and 2,000 euros.
It can be really painful for the consumer. Because despite the general low interest rates demand many banks for the “Dispo” between ten and 15 percent interest – with a debt of 2,000 euros are calculated on the year 200 to 300 euros. In these cases, rescheduling at a lower interest rate may make sense.
The good: With a installment loan, you can replace not only an old installment loan, but also easily your credit line. The interest advantage is often enormous. Because even if you are in minus with your checking account, that does not necessarily mean that the bank is rating your creditworthiness negatively.
Depending on your personal credit rating, banks are currently offering you a 2,000-euro installment loan with a two-year term that is less than five percent – in comparison to the credit line, the interest burden on rescheduling therefore drops significantly. In addition, you may replace a credit line at any time. So in no case is a prepayment penalty payable.
A small drawback of installment loans compared to the line of credit is the less flexibility – because the monthly interest rate you need to operate. But this supposed disadvantage also has its good side: Knowing the fixed monthly installments, it is easier for many consumers to pay off their debts than if the repayment in the “dispo” seems to be “voluntary”. In addition, the installment loan has a fixed interest rate, while higher disinvestment rates can possibly continue to rise.
How do I replace my mortgage lending?
With a real estate loan different rules apply than with an installment loan. For example, mortgage lending is not covered by the EU consumer credit line – with the result that there is no one-percent cap on the prepayment penalty. Instead, real estate financing is subject to a so-called fixed interest rate, which de facto ties the borrower to his bank in the first few years. A rescheduling would not count on the interest rates.
This makes it all the more interesting for you as soon as the contractual interest commitment expires. Because then you can sometimes save in the search for a follow-up financing four-digit sums. Firstly, this is due to the high amounts involved in mortgage lending. The second reason is the long maturities, which makes the current low interest rates even more noticeable (according to the Bundesbank, the average interest rate for a five- to ten-year real estate loan since 2004 has fallen from 4.96 percent to 2.31 percent). In this case, they should seek loan offers and determine whether a replacement of the existing loan pays off.
And third, if you pay off the debts for your house for years, then you own a large part of the property now – and no longer the bank. Your credit rating is correspondingly better, which further reduces the interest rate. For example, with follow-up financing over five to ten years, an interest rate of less than two percent is now completely normal. In this case, you can save a lot when rescheduling.
Check notice period for fixed interest
The length of the fixed interest is regulated by contract. However, if you have agreed with your bank, for example, a 15-year fixed interest, you have a one-sided notice period after ten years in accordance with § 489 para 1 no. 2 BGB. Given the current level of interest rates, you should make use of it.
How to find a favorable follow-up financing
- Do you have an eye on when your contractually agreed fixed interest period expires or when you can benefit from § 489 for extremely long fixed interest rates?
- Begin early to familiarize yourself with the current mortgage loan conditions. Two to four months before the interest rate lock on your existing real estate loan ends, you should start exploring the market. Get a rescheduling offer from your own bank. Compare this with the offers of other providers. Here, our mortgage calculator helps you.
- Change the provider, if your house bank offers you not similarly good conditions as the cheapest banks in the comparison. Fees may not be charged for the change. Costs are incurred only for the assignment of the mortgage – they are in the case of a change of banks at 0.1 to 0.2 percent of the mortgage. So much money should the new provider so be cheaper in any case, so that makes the change.
Can I also repost several loans?
In addition to the lower interest burden, rescheduling can also fulfill another purpose – to bring order into one’s own finances. It often happens that consumers have not just one, but several consumer loans run side by side. If then the current account slips into the downside, threatening to lose track of their own liabilities. In such cases, rescheduling can not only save interest, but also give orientation. In many cases, you benefit from the rescheduling of an interest savings. If you apply for a new installment loan as part of the rescheduling, you can still save interest by a second borrower. In most cases, however, you must live with the second borrower in the same household.
However, you should always bear in mind that different prepayment rules may apply to different loan agreements. Therefore, you must calculate the possible compensation payment for each of your old loans and include them in the total costing.
What are the benefits of rescheduling my existing loans?
When you replace existing loans, you focus the monthly repayment on one installment. As a result, interest rates often fall. It also gives you a better overview of your monthly expenses.
What is the credit for a debt restructuring?
Determine the amount of existing loans before taking out the new loan. Add all open residual liabilities for this purpose. If you are unsure about this, you can contact the banks directly and ask for them. Also, give all information about any prepayment penalty. You will also find this information in your existing loan agreement.