A loan to pay off debts is by no means a paradox, but makes sense in many cases. The total amount of existing debts does not fall due to the new borrowing. Rather, it remains the same for a pure rescheduling and even increases slightly if the new loan – which is usually the case – turns out to be higher than the previous liabilities.
Nevertheless, the new loan will reduce the cost of borrowing in the long run. In addition, it can simplify the repayment. Applying for a loan to pay off existing debt is easy. A special feature is that the borrower specifies the purpose in this case. Otherwise, the bank would have to take into account the repayment installments for the previous loans in its revenue and expenditure account, which should in most cases lead to the non-acceptance of the loan application. Due to the mention of the loan repayment as a credit reason, the financial institution only checks whether the regular income of the applicant is sufficient for the settlement of the new loan.
When is borrowing for debt repayment makes sense?
For bank customers, a new debt repayment loan makes sense if the overall costs are reduced. These are calculated on the one hand from the interest savings of the cheaper loan and on the other hand from the costs for any prepayment penalty to be paid for the premature redemption of the existing liabilities. As interest rates have declined regularly over the past few years, older loan agreements often involve high interest rates. Another reason for a loan to repay debt is the extended term of the new loan agreement. This is automatically associated with a reduction in the monthly loan installment.
The inclusion of a new loan to extend the term is advisable if the previous contractor has rejected the desire for such a loan for the existing contract. Banks specializing in debt rescheduling often advertise that a single counterparty is easier than the further servicing of loans at different financial institutions. This advantage alone, however, is immaterial, especially since the usual in loans direct debit payment method makes the borrower no work. A new loan to pay off the old debt is therefore only meaningful if the consumer thus additionally receives an interest savings or a reduction in the monthly rate.
Must all outstanding debts be repaid by a new loan?
Whether the customer has to pay off all existing loans with a loan to repay debt is regulated differently depending on the bank. Usually, particularly favorable loans such as car finance, promotional loans from Intrasavings bank, zero-percentage financing via retailers and real estate financing can be left out. Also, not all lenders set aside credit card and discretionary credit balancing on the bank account. However, the inclusion of these loans is urgently recommended in both cases, since partial payments on credit cards and overdraft facilities are among the most expensive types of credit.
The new lender can be in an application for a loan to debit debt give the account numbers of the existing loan agreements and remits the respective installments directly to this. By doing so, he excludes that, contrary to his claims, his client uses the new loan for purposes other than redeeming existing debts. Some credit card issuers do not allow money transfers by third parties. In this case, and inevitably when the current account is cleared and any increase in the total volume, the lender transfers the corresponding installments to the current account of the applicant.
What do borrowers look for in debt repayment loans?
Some financial institutions offer a loan to repay the debt at a discounted rate compared to a loan on purpose. Such offers are often interesting but should not obscure the fact that other lending institutions may lend a loan without earmarking at even lower interest rates.
The key criterion in a credit comparison is the effective annual interest rate. It is, however, especially in the case of a debt repayment loan, that it makes sense to pay attention to the flexibility of the new bank loan. The right to special repayments without the calculation of prepayment interest rates offers the possibility of prematurely repaying the new loan if general lending rates continue to fall.
At least as useful to the borrower is the contractual agreement to suspend once a year at a rate or to have the repayment plan modified as needed. For the latter, although a goodwill of the bank is conceivable, but offers much less security than a matching clause in the loan agreement. The monthly installments of a loan taken out for debt repayment may not be too high, because the renewed use of the disposition credit for the transfer of a monthly installment does not make sense. Low monthly repayments can be achieved by a sufficiently long credit agreement term. A repayment period of up to seven years is possible at almost every bank. Some financial institutions offer consumer debt repayment loans with terms of up to ten years.