A debt rescheduling can save a few thousand dollars – but you have to be careful that you have the right strategy, otherwise you end up paying.
It has probably already happened to many that when you look at the terms of your financing that you signed some time ago, you are no longer too happy with it. The first thing you will see is that you are paying too high interest. The thought of a new loan with better terms to pay the old financing comes quickly. However, debt restructuring is not always the best option, and it is often not even advisable to look at the contract of the existing financing. Debt is not always worthwhile.
Fixed interest period and early repayment penalty
It may be that if you look at your contract of existing financing, it will not be possible to reschedule. In order to be able to terminate the loan, there must be no fixed interest period in your financing contract. A fixed interest period is a certain period in which you have to pay the agreed interest rate in any case. Actually, a fixed interest period is not a bad thing because it gives borrowers a basis for calculating the financing – nor is this fixed interest periods ubject to market fluctuations in interest rates. But with such a clause in the loan agreement, the termination and thus the rescheduling of the financing is not possible (without any problems). Of course, you can also cancel your existing financing, because if you really want it, a bank will rarely oppose it. However, this becomes expensive: By canceling the loan, the bank has the right to a prepayment penalty.
The amount of the prepayment penalty depends roughly on the period of the fixed interest period. That means, the longer this would have taken, the higher the compensation amount to be able to replace your existing financing. If you decide to pay the compensation amount, it makes sense to repay it with the new loan for debt rescheduling.
By canceling the financing, the bank incurs a loss on the interest you pay. The bank compensates for this loss with the prepayment penalty. The bank also has another disadvantage when it comes to its investment strategies. Since the loan was now repaid earlier than was actually agreed – one should think that the bank should be happy – the bank can only invest the capital on the market at a lower interest rate. This means a loss for the bank, because continuing your loan would have made it more profitable.
If you terminate your loan in this way, your lender will usually also require you to complete the new debt rescheduling. As a result, you remain the bank’s customer.
Debt rescheduling – calculate well and identify alternatives
Debt restructuring also needs to be calculated very precisely. The alternative to a debt rescheduling loan is usually forward loans, which are somewhat more flexible and are also easier for the borrower to calculate whether they are worthwhile.
Making the debt rescheduling at the house bank has advantages and disadvantages. Then of course the prepayment penalty would be – in which case you can also negotiate with the bank. Then it is even an advantage if you already know your client advisor and can talk to them. In addition, you must not forget who is doing whom a favor with the loan. Not only do you benefit from a loan, the banks do too. In this respect you have the leverage of the competition on your side, to which you can also switch in the event.