Loans are often taken out over a relatively long period, for example, due to the high loan amount. It can happen that contracts have been concluded for various reasons that are no longer up to date. Perhaps the borrower’s financial situation has improved. Perhaps interest rates on the credit market have dropped. There are various scenarios that make a new loan appear to be lucrative to replace existing loans.
The monthly rate no longer corresponds to the financial situation
One possibility that makes the new loan appear attractive to settle an old debt is a new income situation for the borrower. If, for example, he is no longer able to pay the required monthly installment of his existing loan, he can look for a new loan with a longer-term. With this longer-term, there is also a lower monthly charge for the borrower. The loan amount from the new loan is used to replace the old claim.
The borrower should, of course, keep an eye on his income situation. If he succumbs to the temptation of new loans to reschedule debt and steadily increase his credit line, over-indebtedness threatens over time, which can only be overcome with professional help.
The credit market now offers more favorable conditions
Another way to use a loan to reschedule debt is to change interest rates on the capital market. If interest rates have fallen since the existing loan agreement was concluded, it is worth taking a look at specific current offers together with a look at the existing contract documents. If a loan is offered that is cheaper than the existing financing, taking out a new loan to replace the old contract can be worthwhile.
The condition for this is, of course, that the old loan can be repaid in advance without the lender having to pay a prepayment penalty. This payment can be stipulated in a contract to compensate the lender for the interest lost due to early repayment. If these costs are incurred, it is in most cases advisable to keep the old loan running.
In order to remain flexible and save even during the term of a loan through a skillful rescheduling, every borrower should pay attention to the clauses on special repayment when concluding the contract.