Redemption value
When people hear the term "redemption value", they usually think first of leasing rather than loans and banks. In the context of leasing, the redemption value is the residual value that a leased item, for example a car, still has after the end of the contractually agreed leasing period.
The redemption value is the amount for which the lessee could buy the car at the end of the contract term and thus take it into his ownership. This amount is determined and recorded already when the contract is concluded. However, to stick with the car example, accident damage, wear of important parts or a high mileage can reduce the vehicle's value, which is a disadvantage for the lessee. If he decides not to buy out the leased item, the lessor can resell it to other people or otherwise realize its value.
Pay off a loan and save on installments
With regard to loans, the redemption value has a slightly different meaning. When loans including all deposited securities are transferred from one lender to another, this is referred to as loan redemption or refinancing. Through a loan redemption, several loans that were granted by one or several lenders can be consolidated into a single loan.
For the borrower, such a refinancing has some decisive advantages. It is considerably easier for him to keep an overview of his financial situation because he no longer has to monitor the repayment schedules of several loans at the same time. In addition, refinancing reduces the costs of loan repayment.
The amount of monthly interest charges and the number of installment payments usually decrease because interest only needs to be paid to one financial institution. The duration of the repayment period also generally shortens considerably. For this reason, loan redemption is a means by which borrowers can save money, since the borrowed money becomes cheaper for them.
One application to the assuming lender is sufficient
Before an existing liability can be transferred from one lender to another, the borrower must submit an application to the lender who is to assume the loan or loans.
Further communication then primarily takes place between the two involved lenders. Among other things, they negotiate the redemption amount that will be due for the loan at the date desired by the borrower. This redemption amount corresponds to the loan's redemption value. The redemption value—whether it concerns a leased car or a loan—is a calculated figure. It indicates how much something is worth at a specific point in time during the contract term.
The redemption value of a loan consists of various elements. Among them are the current outstanding balance, the interest accrued up to the desired redemption date and possible processing and administrative fees charged by the current lender. With some loan brokers it is also possible that a prepayment penalty must be paid. This charge often applies when a loan is terminated early by the borrower or, in the case of loan redemption, by another bank.
The required redemption amount is transferred by the bank assuming the loan to the other bank. This completes the redemption. If no securities are pledged, loan redemption is therefore a quick, uncomplicated and unbureaucratic process.
Don't forget the loan securities when redeeming
Loan securities are assets intended to increase the likelihood that a borrower will repay the borrowed money including all interest within the agreed period. Lenders require securities when they consider the loan to be too risky and, due to insufficient creditworthiness of the borrower, fear that the borrower may not be able to repay the money.
If the borrower truly does not pay his installments, the lender can realize the assets specified as security at contract conclusion. A security is therefore a protection for the lender, the creditor, against default risk. Common loan securities include mortgages on real estate or land.
Guarantees from relatives, acquaintances, business partners or guarantee associations are also possible if the borrower's creditworthiness is not sufficient. Such securities must not be forgotten in the case of a loan redemption. The assuming bank usually asks about the pledged loan securities when it inquires with the existing bank about the redemption amount. If costs arise for the transfer of the securities, for example due to notary fees or changes to entries in the land register, this also has an impact on the amount of the redemption value.
Loan securities must be handed over to "trustworthy hands"
For the transfer of loan securities from one lender to another, the borrower must place an escrow order. As soon as pledged loan securities are involved, both parties have a service to provide.
Without securities, only the assuming lender plays an active role. He transfers the redemption amount and the transaction is complete. However, if securities must also be redeemed, the original lender must also become active. In that case, the new lender redeems the existing liabilities and, in return, receives the securities from the old lender. To ensure that nothing goes wrong in this process, the transfer of the redemption amount is carried out under the terms of an escrow order. Escrow means that the right to an item is fully transferred from an escrow giver to an escrow taker.
Translated to loan redemption, this means that the old bank only receives the redemption amount if it hands over the securities completely to the assuming bank. The escrow giver then loses his legal claim to the loan security. If a transfer of the securities is not possible, for example because claims against the borrower are still outstanding, the old bank does not receive the redemption amount. The escrow order is thus considered rejected and the loan redemption fails. In that case, the borrower must first meet the claims of his current bank. Otherwise, loan redemption will not be possible in the future either.