In the case of installment loans, in particular, these are taken up by the borrower and, as agreed, repaid over the term. Sometimes, however, it may make sense to prematurely replace an existing loan and convert it into another loan. In this case, debt rescheduling or loan debt restructuring is used, which may also mean that a regularly repaid loan is replaced or extended by a new loan.
What is a loan rescheduling?
In general, it is then spoken of a loan debt, when an existing loan is replaced by a new loan. Debt repayments are very common in practice and mainly affect the three loan rates disposition credit, installment loan and real estate loan. In principle, there are several reasons why loan remubbing can be useful in practice. Especially the following situations are the ones that make a retraining sensible:
- Disposition credit is used regularly
- Various smaller loans are available
- Current real estate loan expires
- Construction loans should be replaced prematurely due to high interest rates
In these and other situations, it is definitely worth considering whether a loan reminder can make sense. However, it should always be calculated beforehand whether the rescheduling of the loan to date in a new loan actually saves the borrower or whether the rescheduling brings other benefits.
Credit debt from the credit line in installment loan mostly makes sense
A loan remubbing, which is still used by clearly too few consumers in practice, but almost always makes sense, is the rescheduling of the discretionary loan in a installment loan or in another loan variant, such as in a framework or call-off loan. Since the discretionary credit is by far the most expensive private customer loan, it is almost always possible to save interest costs in the future by means of a targeted loan remittance. The rescheduling of a disposition credit is particularly useful under the condition that the discretionary credit is not used as intended. This is the case, for example, under the following conditions:
- Disposition credit has been used for many months or years
- Account is being overdrawn to a relatively large extent
- Customer should reduce balance on the current account, but there is no discipline
- There are relatively high disbursement fees paid
In all these cases, it is very probable that the loan repayment from the repayment credit to a installment loan would in future lead to a significant saving of interest. If one compares that the discretionary interest rates still average about ten percent, but installment loans are often already available at interest rates of four or five percent, the significant savings potential already shows. The future savings in interest rates are even greater if one compares the extremes of both types of credit. Quite a few banks and savings banks still estimate overdraft rates of 12 or 13 percent, while the cheapest installment loans are already available for below three percent. In some cases, customers could save ten percent in interest annually if they make a debt restructuring from disposition credit to installment credit.
The loan remittance as such is straightforward, if a discretionary loan is to be converted into a installment loan, relatively simply and transparently. In the first step, you should compare the banks’ offers in the area of installment loans, which we offer you, for example, free of charge and individually through our credit comparison. If you have decided on a new lender, you will receive a installment loan, which should at least equal the amount of the currently used credit line. The loan amount will then be credited to your checking account, so that the debit balance is balanced out almost automatically. Now you should just tell your bank that you no longer have a dispositional framework on the checking account, so that you do not fall into the old “rut” and gradually out of habit gradually overdraw the account again.
Worth knowing: Credit debt from disposition in installment loan often makes sense
In the vast majority of cases, it makes sense to reclassify a discretionary loan into a installment loan. This is especially true if the credit line has already been used for a longer period of time and to a greater extent.
Combining loans as another reason for a loan remission
While the rescheduling of discretionary loans in installment loans or call or framework loans is mainly about paying less interest in the future and therefore cutting costs, there is another reason that is also more often the cause of debt restructuring. And it is more and more consumers in Germany, the pay off not one, but three or even more different loans. The reason is in particular that more and more spending and the purchase of consumer goods are financed as a matter of course through a loan. It is not even extraordinary that families and households today serve three to five different loans, because the funding is relatively quick, for example, by the following common expenses:
- Buying a new car
- Financing a larger vacation trip
- Buying new furniture
- Purchase of media and household appliances
The problem, however, is for quite a few borrowers who are paying off three or more loans at the same time that sometimes the overview is lost. At times, this can even be a precursor to over-indebtedness, with some consumers losing track of the monthly burden of existing loan installments. So maybe another loan will be taken, even though the available income is already barely enough or not at all enough to cover all monthly expenses.
In particular, in such cases, it may make sense to undertake a debt rescheduling, rather than accepting a new larger installment loan, which at the same time replaces all existing loans. With the loan installment loan this is usually straightforward possible, since only a few banks refuse premature replacement or in this context require a prepayment penalty. So, if you want to have a better idea of what loans you are currently servicing and how much the monthly charge is in the aggregate, you may well want to make a debt repayment as described above.
Our tip: Credit debt for arranging payment obligations
If you serve several loans and sometimes have the impression that you are not aware of the total monthly debit and also the respective terms of the loans, then a debt repayment or a rescheduling without Credit Bureau can be the solution. In this case, you simply take out a new and larger loan to replace all existing smaller loans and get back to a very good overview.
Loan debt in real estate financing on the agenda
Debt repayment is not only used in the area of overdraft facilities and installment loans, but also in the context of real estate financing, it is almost on the agenda. This is particularly evident in the low-interest phase, as many borrowers, who have been repaying a construction loan for several years, for example, wish to repay the loan prematurely and take out a new real estate loan with significantly lower interest rates. This is also the main reason for debt rescheduling in the area of mortgage lending, namely to be able to save interest on the new loan in comparison to the previous loan.
In contrast to the area of installment loans, however, in the case of real estate loans, it is usually the case that the bank will agree to a premature redemption, but almost always calculates a prepayment penalty. For this reason, it is extremely important for a planned loan debt restructuring in the area of real estate loans to know the amount of the prepayment penalty and then to calculate precisely whether, under this condition, interest savings can actually be realized in the future. How such a calculation could be done, we would like to illustrate with a short example:
- Remaining debt of the current real estate loan: 120,000 USD
- Previous interest rate: 4.6 percent
- Remaining term of fixed interest: 4 years
- Interest rate on any new loan: 2.2 percent
- Prepayment Compensation to be paid: 8,000 USD
- Savings on interest without prepayment penalty: 11,520 USD
- Savings on interest after deduction of prepayment penalty: 3,520 USD
In the calculation, it becomes clear that the possible interest savings are, of course, always calculated only for the period in which the previous real estate loan or fixed interest rate would still have residual maturity. In this case, there are four years, because after this time, the borrower could already carry out follow-up financing without paying a prepayment penalty. However, the example shows that despite the inclusion of the prepayment penalty to be paid by the loan debt restructuring in the sum of an interest savings can be achieved. However, if the prepayment penalty were higher, or if the interest differential between the old loan and the new loan were not quite as large, it could well happen that after taking into account the prepayment penalty, only a very small or no interest savings will be shown. For this reason, it is important to calculate exactly whether the rescheduling actually pays off in the case of a planned rescheduling in the area of real estate financing during the fixed interest period.
In addition to the early redemption of real estate loans, debt rescheduling is also discussed if follow-on financing is to be carried out at the time at which the fixed interest rate expires. In this case, there are two possible forms of debt rescheduling, namely, that the previous loan is extended at the same bank, then, of course, on the current terms. On the other hand, it is of course also possible after the expiry of the loan to compare the offers available on the market and ultimately decide on the real estate loan with another bank.
Conclusion on credit debt
A loan reminder is useful in many areas nowadays and has two main reasons. On the one hand, in particular the rescheduling of discretionary loans in installment loans and in the area of real estate financing usually focuses on future savings in interest costs. If, on the other hand, installment loans are rescheduled and the borrower remains in the same type of loan, the better clarity is often due to the elimination of smaller loans. Regardless of which form of rescheduling you choose, you should always compare all the costs of possible savings, because only then can you determine whether the rescheduling of the loans is financially worthwhile at all.