Interest rate adjustment
What is meant by an interest rate adjustment and when is it sensible? What should you consider when deciding on an interest rate adjustment? These questions are answered in our article on interest rate adjustments.
Loans and interest rate adjustment
Loans come in different forms. There are small loans that are usually repaid within 24 months, and there are loans with higher amounts that require a long repayment period.
Especially for large loans with a long term, a fixed interest rate is only agreed for a certain period. How long this period is is specified exactly in the contract. It can be between 5 and 15 years. If this period has expired and the loan has not yet been fully repaid, new terms regarding the level of interest must be agreed. For this, the borrower can take different routes.
On the one hand, they can accept an offer for the interest rate adjustment from the current lending institution, or they can take out a follow-up loan with an external institution, depending on who has the best offer regarding interest rates. Once this offer is found, it only needs to be signed and the loan will continue under these conditions.
The offer for the interest rate adjustment
About six months before the fixed-interest period expires, the current lending institution will prepare an offer regarding the continuation for the borrower. On the one hand, this will be oriented to the loan. The remaining debt amount and the borrower's personal circumstances will determine the interest rate adjustment. On the other hand, the currently prevailing interest rate will also play a role.
The institution will very likely prepare an attractive offer, as there is always an interest in retaining the borrower. The income from the interest is too high to let such a customer go.
With the prepared offer, the borrower can easily obtain other offers and compare them. The important factor here is always the annual percentage rate (effective annual interest rate), since it includes all costs and fees. In addition, attention should be paid to ensuring that the monthly installments are the same amount across all offers. Only then can a meaningful comparison be made.
Change of provider or interest rate adjustment?
Now it is time to secure the best offer. If you change the provider, they will carry out a general check regarding creditworthiness. The Schufa will be queried and the credit rating determined. In addition, a steady income and possibly a guarantor must be proven.
If you use an offer from the internet, the relevant documents must be sent to the provider. If you choose a local provider, all credit-relevant facts can be clarified in a conversation. Allow several days for the entire process, as lenders tend to check everything very carefully, especially for larger sums.
It is easier if you do not change the provider. Here you only have to sign the extension for the interest rate adjustment. If there have been no irregularities in repayment so far, the lending institution will usually forgo another check of creditworthiness. The new contract for the interest rate adjustment only needs to be signed, and after the fixed-interest period expires the new contract with the new interest rate will automatically take effect. Termination of the old contract is not necessary, as it expires normally and therefore does not require termination.
When an interest rate adjustment should be made
An interest rate adjustment usually goes hand in hand with a debt restructuring (refinancing). It is made when the first loan contract expires. The duration is specified very precisely in the loan agreement. If you as a borrower want to have an interest rate adjustment carried out in advance, this must be discussed with the lending institution.
If this option was not provided for in the contract, a fee may be charged. In such a case, the borrower should calculate very carefully whether an early refinancing is worthwhile, because if the fees exceed the savings from refinancing, you should reconsider this rather time-consuming step and see if there might be another option.
One such option could be a forward loan. With this type of loan you reserve a favorable interest rate many months or even years in advance. If you notice that rates for the type of loan you use are falling significantly, you can reserve this lower rate. It will be fixed and will then come into effect when the follow-up financing is needed.
It does not matter how high the interest rate is at the time of the follow-up financing. The interest rate you have reserved always applies.
Forward loan for interest rate adjustment
A forward loan therefore offers the opportunity to arrange an optimal interest rate adjustment. However, it is important to keep a close eye on interest rate developments in order to actually make good use of an offer. If you are not well versed in the financial market or do not have the opportunity to constantly keep an overview, it is worth getting advice. An advisor is familiar with the market and can give tips on the right timing.
In addition, the option of a forward loan must be noted in the contract so that you can use it without fees and additional charges. Furthermore, a forward loan is generally somewhat more expensive than a normal installment loan.
Despite this, the savings can be enormous. For example, if you are able to adjust the interest rate by 0.5%, this small change can already mean several thousand euros in savings — and this applies not only to a forward loan but also to a regular refinancing where an interest rate adjustment can be made.
Different offers for interest rate adjustment
It often pays off to present an offer from an external lending institution to your current lender. Since they are generally reluctant to lose a good customer, they may revise and improve their own offer. If it then comes close to the external offer, you can stay with the old institution and use its offer. This step would save a lot of work and probably also the costs of switching. You as a borrower would have much less to take care of and can confidently continue working with the institution you already know.