Many people are looking for a loan for debt repayment. Loan interest rates have fallen sharply in recent years.
Older loans are much more expensive than current loans. Can help a debt restructuring. But with that mistakes can happen fast. The following explanations are intended to help you avoid them.
A rescheduling must be absolutely cheaper overall. It is not enough that the new loan for debt repayment has a lower interest rate than the old loan. Various other points have to be considered. Thus, a penalty for the early replacement of the old loan is likely to be due. In technical terms, this fee is prepayment penalty.
The amount of the prepayment penalty is legally capped. If the loan lasts for more than 12 months, it amounts to 1 percent of the balance of the loan. If the remaining term is less than one year, the prepayment penalty is 0.5 percent of the balance of the loan.
Caution: The statutory limit for the prepayment penalty does not apply to real estate loans. Here you may have to pay a far higher penalty fee. Research this before rescheduling.
The prepayment penalty is not the only pitfall in a debt repayment loan. The term of the new loan can also be a problem. If this is chosen too long, rescheduling can become more expensive. And this despite lower interest rates on paper.
This sounds very abstract. An example should clarify this. Your old loan will run for another year. The remaining loan amount is 2000 euros. The interest rate is 4 percent. The interest rates are accordingly at 80 euros. Your new loan has an interest rate of 2 percent. It runs, however, 3 years. The interest would be 122.42 euros. The prepayment penalty of 20 euros is not even included. The rescheduling would almost double your interest costs accordingly.
Another problem with a loan for debt settlement may be the compulsion to open an account. By no means every bank pays the loan on the accounts of other banks. Many financial institutions insist that you open an account with the bank itself.
The current account is usually not in vain, but costs renewed fees. You must include these costs for the rescheduling. Also make sure that there are additional fees and charges. Foreign banks in particular like to charge fees for the preparation of account statements in the case of loans.
Normally, a loan comparison should always be in place before you take a normal loan. The loan for debt settlement may be slightly different. Due to the prepayment penalty, it may make sense to ask the old bank first. If you repost the bank yourself, it may charge you the fee.
In any case, the previous bank is the first contact if you have a negative private credit. Unfortunately, it’s getting a bit complicated now: the rescheduling is actually good for your private credit, as it reduces your debt. However, if you take the loan from another bank, you have two loans for a short time. This is poison for your private credit score. Within a bank, however, the debt restructuring is handled directly. For the private credit no second loan appears. Accordingly, there are no problems.