What should be considered when refinancing a loan?

There are various reasons why refinancing a loan can make sense. Primarily, the fact that the general interest rate level — and therefore loan interest rates — are subject to significant fluctuations is likely to play a role.

Especially in times of low interest rates, people who have been repaying one or several installment loans for a long time may benefit from refinancing.

Anyone seriously considering refinancing a consumer loan or an overdraft should first obtain detailed information about loan refinancing and carry out a comprehensive comparison online.

You should consider not only the level of the effective annual interest rate and the length of the term, but also whether the quoted rates are credit-score-dependent or independent of credit score.

Credit-score-dependent loans are recommended for consumers who can demonstrate a good to very good credit rating. In that case they pay significantly less interest than if they opt for a credit-score-independent loan for refinancing.

Of course there are exceptions. Conversely, almost anyone with only a mediocre or sufficient credit rating is better off with a credit-score-independent loan for refinancing. Only when the personal interest rate is firmly determined should the borrower make a binding decision on whether and to what extent refinancing is sensible.

Under no circumstances should the fact be overlooked that many banks are entitled to charge a prepayment penalty in the case of refinancing. If this is the case, the prepayment penalty could be so high that it quickly wipes out any potential interest savings from a new installment or consumer loan.

Refinancing an overdraft

Employees, pensioners or civil servants who hold a current account will generally be granted an overdraft by their main bank. The size of this overdraft is contractually agreed and will typically amount to around two to three times the monthly income.

Under certain circumstances it may even be possible to increase the overdraft further. However, this should never become the rule but rather the exception. If the overdraft is fully utilized and there is no prospect of repaying it fully or partially in the foreseeable future, refinancing should also be considered.

In some individual cases the bank may even explicitly advise the customer to do so. Refinancing in this case would mean that the overdraft is converted into an installment loan. It is then repaid step by step with the aim of gradually bringing the account balance back to zero.

It should be noted, however, that it is by no means necessary to carry out the refinancing with the same bank that holds the current account. Under certain circumstances it can even be sensible to look for another bank and apply there for a standard installment loan.

Since such a loan is almost always available for general use, it should not be a major problem to use it to pay off or refinance the overdraft. The loan is paid out in a single amount, transferred to the current account and must then be repaid in regular monthly installments.

This refinancing option has the great advantage that the customer can choose independently of their main bank which loan is right for them. In addition, taking out a loan with another provider usually does not lead the main bank to reduce or cancel the overdraft, which can happen quickly if the main bank itself grants an installment loan for refinancing.

Consolidating multiple loans

It is not uncommon for a person to have several installment loans and at the same time a substantial overdraft on their current account. In such cases it is easy to lose track of individual financial obligations. Refinancing should definitely be considered in this case.

If the necessary conditions are met — income is sufficiently high and the Schufa credit report is in good order — it should be no problem to consolidate all loans as part of refinancing and replace them with a newly taken out installment loan. For borrowers with a negative Schufa report and low income, there is the option of a loan without Schufa or naming a guarantor.

Once this is done, only a single monthly payment needs to be made to one place. This makes the personal financial situation transparent again, significantly reduces administrative effort, and — more importantly — a substantial amount in interest payments can be saved.

Anyone who wants to receive an installment loan must provide a current account to which the total loan amount will be transferred after approval. This process usually takes only a few hours or days. A cash payout at the bank counter or by postal order is almost always impossible. Only with a foreign loan granted without Schufa might this procedure be practiced under certain circumstances.

This way the customer is assured that the loan granting remains largely anonymous and that neither the main bank nor Schufa finds out about it. Every installment or consumer loan, whether domestic or foreign, must be repaid with fixed monthly payments. How high these instalments are in the individual case and over what term they extend is recorded in writing in any case.

The customer receives a loan agreement from their bank or private lender that regulates all details. In this context, it is very important to pay attention to whether special repayments or early loan payoffs are possible from time to time. This is particularly important if the customer intends to regularly compare loan conditions from different banks and, if necessary, refinance again.

Private loans for refinancing

A bank loan is not always the optimal solution. This is especially true when interest rates are very high. If possible, it may therefore make sense to look for suitable alternatives and also consider a private loan from friends or acquaintances. A refinancing that is partly a bank loan and partly a private loan could also be sensible in some cases.

A private loan for refinancing could even be granted entirely without interest, an option that would be completely excluded with a bank loan. This applies even if there is a long pause between the loan payout and the start of repayment. An example would be a private unemployment loan that only needs to be repaid when the borrower’s financial situation has improved and they have found new employment.

Even if a private refinancing is possible in extremely difficult situations, the borrower should be aware that this always represents a great show of trust on the part of the lender, which must under no circumstances be disappointed. For this reason it is strongly advisable to adhere to the individual personal agreements made at the time of the loan payout.