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When is it worth the loan redemption?

Why is it good for you to use it?

Not many people have in mind the loan redemption. This is not a big miracle in the view of what an average person faces if they want to accomplish it on their own.
Another reason is that if you took out the loan yourself, I am sure that you do not want to run into a bank again. If you took it through a credit agency (eg in the case of buying a home), then of course the reason for the existence of trust is that do not even think about it. In some cases, however, it makes sense to at least play with the idea or at least see clearly.

Refinance

What is a loan redemption?

Loan redemption, in other words, refinancing, is the final repayment of your existing loan with a loan from another bank.

When the loan redemption is good for you?

1. If you refinance your loan, you have the option to pay back less money overall

In other words, you get the same, only cheaper.
There is a fee for the final repayment, but you can also calculate this on a plain sheet of paper to see is it worth it.

At the end of the article, you’ll find a calculator that shows the difference between the two loans if you don’t elongate the term. If that’s a big enough difference for you, it’s worth switching.
Just write your current interest rate in place of the “old interest rate” and the interest rate on the new loan you are looking for in place of the “new loan”.

2. You can combine multiple existing loans and only repay in one direction.

You could say it’s not a big deal, you’ve been able to follow it so far. It’s not about tracking either.
Suppose you have the following loans

Credit APR
Personal loan 13%
Credit line (utilized) 5,5%
Car loan 8%
Mortgage loan 5,9%

In the case of a loan redemption, you have the opportunity to redeem the whole thing, so you can do well even if the APR of the mortgage loan does not decrease much.

A bank may also be able not to merge the part of the purchase of a home with the others. In the latter case, you would be worse off (free-use loans are always more expensive than housing loans). Then you pay to one bank in the same way, there will be a single repayment day, only 2 lines will appear in your bank account. (But I think because of that, few people would squint their bellies, especially since they now know that a full merger may not be a good idea.)

3. It reduces your risk.

There are basically several ways you can do this. Staying with the example above, on the one hand, reduces the APR, so the repayment can go further as well. And with a lower repayment, there’s obviously less chance of something slipping out.
Because you have fewer loans, the chances of you forgetting to pay one are also reduced, even from a fatal misunderstanding (e.g., your belief that your partner has paid and for him that you paid).
For loans whose terms are not completely fixed, the bank may decide to change them at certain intervals. This may “only” affect your credit line, but it does affect it badly. This is less the case with a single well-thought-out loan.
And the +1: if you’re financially disciplined, you can also use the difference between your current and future repayments to prepay. This will also reduce the amount to be repaid.

What is against redemption?

1. It’s not for you that if your income is currently significantly lower than it was when you took out the loans.

The bank is looking at the burden of income. By implication, if your income is lower, the following can happen:

  • they can’t give enough credit to be enough for everything, or
  • they can only offer a longer term than it originally would have been, so you may be paying more interest than if you didn’t do anything, or
  • whereas more banks tend to give discounts to higher-income customers, so you may lose it

2. Don’t think about redeeming a loan if you’ve only recently taken out a loan and taken advantage of some kind of discount.

In the case of a larger loan (typically a home purchase), the bank usually advertises promotions. For example, in the case of disbursement, the real estate valuation, notary and disbursement were free of charge. But if you repay this loan in any way in the first X years, these rebates will jump. This is included in your loan agreement, so you can find it, if you don’t remember it.

3. It’s not for you if you don’t have much time left to maturity.

It’s just not worth it. The disbursement costs of the new loan, the closing costs of the old one, are not equal to the amount you would save.

4. You took out a loan at a really low interest rate.

Then quite simply, even if you have a loan product that has a slightly lower interest rate, the difference between the two will either never extract the cost of redeeming the loan for you, or just for a very long time.

What to look out for at loan redeemption

In my article on annuity loans, I have already shown an example of what it would look like to repay an average mortgage.
In the article, I presented an example of what it looks like in the language of numbers when the term is lengthened a bit. At this point, a little extra money could nominally “fit in”. This, in turn, will cost you a lot in the long run.
What I would definitely look out for is: let’s say you currently have a 30-year mortgage and you’re now in your 8th year. To prevent the above example from happening, don’t accidentally ask the bank for a 30-year loan. But if you want to do well, ask for both the calculation and the setting of the term for a maximum of 22 years.

And here is the calculator promised at the beginning of the article:

 


 

Questions:

  1. How often do you review your loans with this approach? What solution do you usually come up with?
  2. In addition to the above, what pros and cons can you make for or against loan redemption?
  3. Do you think it is a good idea to start loan redemption calculations within the same bank?

If you are interested by this topic, you can contact us here. Feel free to write, I am curious about your opinion.

You can access this article in Hungarian and German
Hungarian flag Mikor éri meg a hitelkiváltás?
German flag Wann lohnt sich die Umfinanzierung?

 

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