Loan repayment is the basic option to cancel an existing loan in its current form. The main goal of this project is to use cheaper interest rates for financing.
In the practice of loan repayment, this does not always mean a change of bank. Rather, the new loan can also be contractually agreed with the previous bank. In these cases, the loan is repaid by rescheduling the existing loan into a new loan on different terms.
With regard to the contractually agreed term of the existing and repayable loan, it is particularly important to consider whether and under what conditions an early termination of the contract is possible. This is linked to the question of what consequences the borrower can expect if the loan is canceled early.
Reasons for early loan repayment
The economic motives for early loan repayment are quite different and always depend on the special circumstances of the individual case. However, three influencing factors can be identified that regularly influence the decision significantly. Are of particular importance regularly
- the specific loan conditions and in particular the interest agreement
- the current development of the interest rate level
- the economic freedom of movement of the borrower
If these influencing factors apply, the following motives are decisive in the event of early loan repayment.
It is initially conceivable that an early repayment of the loan may be considered due to an improvement in the economic situation of the borrower that is not foreseeable when the loan is taken out. As soon as they regain their financial freedom of disposition, the borrower will be keen to pay off any loan debt that may have been binding on them for many years.
Utilization of low interest rates
Interest rates on the capital raising market are subject to constant fluctuations. Their development is therefore difficult to predict. It is therefore easily possible that the contractual interest rates agreed upon when borrowing are decoupled by the general market development in the meantime. Under such conditions, a loan with a fixed interest rate can trigger additional financial burdens, especially in periods of low interest rates. Even in this situation, the borrower will be interested in getting rid of the unfavorable interest rates and initially working with his bank to take out a new loan at improved market conditions. If the bank refuses to reschedule the old loan, there is still the option for the borrower to completely withdraw from the contract.
Expiry of fixed interest periods
A similar motive can exist if an interest rate fixing period agreed in the contract ends. In these cases, the borrower is concerned with obtaining a favorable interest rate determination in the loan agreement. The law therefore obliges the lender to inform the borrower at least three months before the end of the fixed rate period whether he is willing to make a new fixed rate agreement (section 492a (1) sentence 1 BGB). If the lender declares this willingness, he must explain the interest conditions at which the subsequent offer is to be made (Section 492a BGB (1) S.2 BGB).
By providing the lender with information, the legal regulation ensures that the borrower is clear about whether the bank is interested in continuing the previous interest rate agreement. This gives him enough time to estimate the possible changes in the credit terms and their consequences.
Converting floating rate to fixed rate
The situation is comparable for the borrower who wants to get rid of his variable interest rate in order to instead find a cheaper fixed interest rate agreement. In high interest periods in particular, interest rates are immediately passed on to borrowers if they have concluded their contracts at a variable loan rate. Since the variable interest rate is linked to the current market and interest rate development in accordance with the usual loan conditions of the banks, such borrowers are regularly affected by corresponding interest rate adjustments.
In these cases, too, borrowers can first try to change the contract on the basis of a debt rescheduling agreement with their bank. If the bank refuses to do so, a final loan repayment should be considered.
A loan repayment is also of interest to borrowers who have to service several loan agreements at the same time. This gives you the opportunity to bundle all current loans as part of the debt restructuring into one. In addition to more effective debt management and more transparency, money can often be saved sustainably, because merging into one loan brings significant savings in interest rates when a moderate agreement is concluded.
In practice, such debt rescheduling is usually possible without much effort. The borrower takes out a new loan from a credit institution in which all existing loans are to be integrated. At the same time, the credit institution can be instructed to redeem the credit liabilities existing with third-party banks. The resulting transfer costs (payment of all loan debts by the transferring bank) are then combined with the new loan to form a single loan.