Credit refinancing – When it is worthwhile
If you want to take out a real estate loan or a particularly large installment loan, you can currently enjoy particularly low interest rates. But what are the borrowers doing, who have been repaying their loans for a few years and were not able to take advantage of these low interest rates at the time? You are refinancing your loan. You can find out how this works from us here.
The industry is booming
If you take out a loan now and have a good credit rating for it, you can’t complain about too high interest rates, on the contrary. You have never borrowed money from any bank as cheaply as the loans are currently being granted.
The reason for this is the Capital Bank, which keeps the key interest rate very low and thus ensures this low interest rate policy. But what pleases the one annoys the other. That is, whenever the other party has to pay a significantly higher interest rate on his loan. And that’s only because it is already a bit older.
A loan refinancing can help here, which always makes sense if a large loan amount is to be repaid over a long period of time. Real estate loans and large installment loans are therefore often provided with an interest rate fixation that does not exist for the entire repayment period, but only for a few years. If the fixed interest rate has expired, a negotiation of a new interest rate can be made with the bank. The specialist calls this loan refinancing.
The borrower has the choice of taking out a new loan from another bank on better terms. Or he can have the current bank create a new offer. This usually takes a lot of effort to ensure that the borrower does not switch to another bank and therefore makes a particularly worthwhile loan offer. If this is accepted, the loan can simply be continued after the interest rate adjustment. If there is a change to another bank, the new loan must first be taken out before the old loan can be canceled and refinanced.
When is a loan refinancing worthwhile?
A loan should always be refinanced or rescheduled if this results in significant financial relief. With large loans, these can be achieved with an interest rate difference of 0.2 or 0.3 percent. Since interest is paid every month, for a period of 20 years, for example, there are many thousands of USD in interest payments. With a clever refinancing hundreds or maybe thousands of USD can be saved. However, only if a lot is taken into account when refinancing a loan.
So it is important that the old loan provides for refinancing. If you do not have this option in the loan agreement, you sometimes have to dig deep into your pocket for refinancing. The bank then demands prepayment penalty. In other words, a penalty fee for early repayment of the loan. And this fee includes several hundred USD. With a bit of bad luck, it can happen that the savings actually generated by the refinancing are eaten up by the penalty fees, and the whole process would then no longer make sense. It is therefore extremely important that the option of refinancing or debt restructuring is always planned for large loans. As a borrower, you are always flexible and can freely decide how to proceed with the loan after the interest rate has expired.
On top of that, refinancing is only worthwhile if the borrower has a good credit rating. It should not have worsened compared to the first borrowing. Only good creditworthiness enables low interest rates, which are a basic requirement for refinancing. It is therefore worth checking your creditworthiness before looking for a suitable new loan to determine whether the whole effort is worth it or not.
By the way: With a real estate loan, the forward loan can be a good alternative to refinancing. The old loan just keeps going. The only difference is that the interest can be “reserved” up to four years in advance. So if you are afraid that interest rates may rise in the near future, you can reserve the currently low interest rate and simply use it after the interest rate has expired. The bank freezes it until then and makes it available even if the actual interest rate is higher when the forward loan is called.