Why a loan change can also make sense
Every year towards the end of the year thousands of car owners change their car insurance because other providers are cheaper. However, only a few borrowers change their loan provider during the term of the loan. You can read why a loan change can make sense in the following article.
Who can change their loan provider?
In principle, every borrower can change providers during the term of a loan. For this purpose, a new loan is taken out from another loan provider, with which the existing loan from the old loan provider is replaced. This is known as debt restructuring. In the following sections we clarify when this is worthwhile and what you should consider.
When can a loan change make sense?
There are several reasons to consider a loan change. This includes the following situations in particular:
- The repayment of an expensive loanIn particular, title loans that have been running for some time often contain a high interest rate. These were completed when interest rates on loans in the market were still at a higher level than is the case today. However, interest rates on loans have been significantly reduced in recent years. For this reason, it can make sense to replace an old and expensive loan with a new, much cheaper one.
- Settlement of overdraftsThe overdraft facility of your own checking account is a convenient way to expand your financial scope, for example if urgent purchases have to be made. However, this should only be used for a short time, since high interest rates accrue for overdrafts. With an installment loan, you can balance your overdraft facility and switch the outstanding amount to another loan provider. This means that you pay significantly less interest on the loan amount.
- Additional financial leewayDo you urgently need new furniture or maybe want to treat yourself to a vacation? With a new loan this is not a problem! The amount of the loan can be selected so that an existing loan is replaced in the same step and you switch to the new provider with the entire loan amount.
- Summary of several loansInstallment financing here, a loan here and there and a small loan – the financial obligations of consumers are often spread across a wide range of providers. The overview can quickly be lost. By switching all the loans to one provider, you can escape this provider and regain an overview of your own finances.
The advantages of a loan change
Switching the loan provider can not only make sense, it also has several advantages:
- The overview of your own financial situation is improvedBy merging several loans and / or goods financing in the course of a loan change, you will ultimately receive a uniform repayment rate for all outstanding obligations. In this way you gain a better overview of monthly expenses and have a better grip on your financial situation.
- Creditworthiness improvementYour creditworthiness, i.e. your own creditworthiness, is decisive for whether the banks grant you a loan and on what terms. Having only one loan instead of several different loans from different providers can help you improve your credit score.
- money savingEspecially if you have one or more loans with a high annual percentage rate, a loan change can be worthwhile. This allows you to save money with the new loan provider by paying less interest. You can either use this money to pay off the loan faster or for other financial wishes.
- Loan repayment fasterIf you switch to a different provider with your loan, you will receive a new loan agreement there. In this you can, for example, also set higher monthly installments than with the previous loan in order to get out of debt faster. Of course, this also applies the other way round. By agreeing lower monthly installments with your new loan provider, you can expand your own financial scope each month.
Switching a loan can have a number of advantages. To take advantage of this, you can easily find a suitable new loan at Capital Lender and apply directly online.
What should be considered when changing loans
According to an EU directive, loan contracts concluded since June 11, 2010 can be terminated without notice to make a loan change. For contracts concluded before this date, a notice period of three months applies. However, you should read your loan agreement carefully when considering a loan change. Banks have the right to demand prepayment penalties if the loan is terminated before the actual term of the loan. This is intended to compensate for the loss of interest income for the bank. The following applies:
- If the remaining term of the loan is longer than 12 months, the prepayment penalty may not exceed 1.0 percent.
- For residual terms of less than 12 months, the bank may demand a maximum prepayment penalty of 0.5%.
However, finding a new loan provider for less than twelve months can be difficult, as the remaining debt is low in most cases. Many banks require a minimum loan amount or a minimum term.
How to proceed for a loan change
In any case, you should carry out a credit comparison in advance of the loan change and compare the conditions of the old loan with the new one. To do this, take the remaining term, the remaining debt, the estimated interest and the monthly installment and calculate the total cost of the two loans:
|Old credit||New loan|
|48 months remaining||48 months term|
|$ 10,000 residual debt||$ 10,000 added|
|6.00% APR||3.50% APR|
|$ 234.12 monthly rate||$ 223.32 monthly rate|
|$ 11,237.76 total repayment||$ 10,719.36 total repayment|
|$ 1,237.87 total interest payments||$ 719.16 total interest payments|
Savings through loan changes:
$ 1,237.87 – $ 719.16 = $ 518.71
Less 1% prepayment penalty: $ 418.71
In this example, you can save a total of $ 418.71 by changing your loan.
Conclusion on the loan change
Especially in the current low interest rate phase, a loan change can make sense in order to save a few hundred USD. If interest rates in the market should rise again, it could be different again. A loan change is particularly worthwhile if the current loan provider enables a total repayment free of charge, meaning that you do not have to pay any additional prepayment penalty. If this was agreed in the old loan contract, it must be included in the consideration of the loan change.