Monthly repayments of a loan often affect the financial situation. Many borrowers have a desire to quickly repay the loan to increase financial freedom. Loan repayment is also very popular because borrowers can effectively save money.
It is a loan replacement
A loan repayment is a debt rescheduling of the borrower. The borrower usually takes out a new, cheap loan to replace the existing loan. The new loan often comes from a new bank. A calculation must be used to assess whether a loan repayment is an option. If the savings on the new loan through interest are greater than the cost of the loan repayment, borrowers should consider doing so.
When it comes to loan repayment, the focus is on debt restructuring with a new loan. However, there are also the following situations in which borrowers replace the old loan.
- Selling objects or real estate
- Lottery win
- Payment of fixed deposits or dividends
- unexpected premiums from employer or insurance
Reasons for a loan repayment
There is one reason in particular for the loan repayment: financial advantages. After all, borrowers only opt for a loan repayment if they benefit financially. With the one-off payment, the borrowers trigger the loan and henceforth have no further financial obligations. The replacement is almost always based on another cheap loan agreement. This effectively saves borrowers money. It can therefore make sense to borrow money from a bank to pay a loan from another bank. Financial motives are always crucial for a loan repayment.
The right time for the loan repayment
Borrowers ask themselves when is the right time to redeem their own loans. In principle, the procedure is always worthwhile when a new loan is cheaper than paying off the old loan again. Phases of the low interest rate policy are particularly suitable for this. When consumers get low interest on new loans, the time is right to redeem the expensive loan contract. The same applies if borrowers use their overdraft facility constantly and a lot. Since the interest rates are above average, the loan repayment is a worthwhile alternative.
These are the advantages
If borrowers opt for a loan repayment, they can benefit from various advantages. On the one hand, savings are conceivable, since the new loan has better terms than the old loan. In the best case, borrowers can even save money and build up financial reserves. In addition, it is possible to redeem various loans and thus gain a better overview of your own finances. From now on, only the repayment of a loan is necessary. In addition, consumers can improve their creditworthiness with a loan repayment. Many current loans have a negative impact on creditworthiness. With just a single loan, a better score is the result.
In summary, a loan repayment offers the following advantages:
- good financial overview
- better credit rating
- less financial burden
- Savings through debt restructuring
Loan Redemption Procedure
The correct procedure for borrowers is required for loan repayment. After all, borrowers must meet some conditions and act properly.
Is it possible to redeem the loan?
The first question is whether and when the loan can be repaid at all. Here it depends on the individual contract conditions. Basically, all loan contracts have notice periods. Consumers must take this into account. However, the younger installment loans can be terminated at any time under EU law. Basically, the possibility of loan repayment differs depending on the contract.
Comparison of several offers and calculation of the meaningfulness
If there is a possibility of a loan repayment, borrowers must then compare several offers. Now it is crucial to find the best loan offer. Afterwards, a calculation is required to determine whether it really makes sense to redeem the old loan. By comparing all the costs involved, a finance-based decision is possible.
Loaning and redemption
After the decision per loan repayment is made, the contract is concluded. After the loan amount has been paid out, the loan is redeemed. As soon as the money is available, the old loan agreement can be canceled.
Tips for the perfect loan repayment
If you want to redeem your loan, you have to follow various tips. After all, loan repayment is one way to effectively save money. A loan repayment in times of a low interest rate enables big savings. In addition, borrowers should always calculate in advance how much money is really saved. By comparing different loan offers, consumers play it safe to take the best offer and exploit its full potential.
That is the prepayment penalty
Not all lenders and financial institutions allow early repayment of the loan. There are often costs associated with redemption in the form of the so-called prepayment penalty. Finally, the lending bank incurs interest defaults, some of which are considerable. The bank’s profit is lower due to the previous repayment. The so-called prepayment penalty serves to compensate for the damage. The loan agreement stipulates the amount that the repaying borrowers have to pay.
Differences between loan repayment and special repayment
Loan repayment and special repayment are often used interchangeably in common parlance. However, there is a striking difference between the two variants. While the old loan is completely replaced when a new loan is repaid, borrowers pay a higher amount for a special repayment. The money is used to partially repay the current loan without changing anything in its existence. The remaining term of the loan is reduced, the same applies to the loan amount. However, the loan agreement remains. Special repayments are associated with comparatively high costs for some loans.
Loan repayment and residual debt insurance
Anyone who has taken out residual debt insurance when concluding the loan contract wonders what will happen to the residual debt insurance after the old loan has been repaid. A transfer of the residual debt insurance is not possible, rather a cancellation is required. Basically, this is not a problem. In addition, the borrowers get the insurance premium repaid.