Debt restructuring costs – good offer to your old loan

Quickly, rescheduling on a cheap loan can actually cost more than it should save due to the prepayment penalty. Debt rescheduling a loan can be a few thousand dollars cheaper with a good offer than keeping the old loan. Many borrowers switch to another bank and take out a new loan there. This new loan, with cheaper interest rates, is supposed to bring the hoped-for benefit and relief of finances. But it is also important to compare exactly when converting to a new loan and to know the conditions.


Contractual or early termination of the loan

Contractual or early termination of the loan

Because the old loan can only be rescheduled if the conditions for termination are met. The provisions for the termination of the old loan are laid down in the credit contract and, in this respect, the termination can only be made according to these contractual rules. The successful termination of the old loan is one thing that has to be mastered. Another is that banks do not have to release the loan before the time limit is fixed. Whether the bank releases the loan for debt restructuring usually differs from bank to bank, but mostly the banks are so accommodating and do so. However, unless otherwise stipulated in the contract, the bank can claim compensation, the prepayment penalty. Due to the premature termination, the bank loses money in the form of interest.


Prepayment penalty: active-active and active-passive comparison

The bank can choose between two methods of calculating the prepayment penalty, which is due if the loan is canceled early. These are the active-active comparison and the active-passive comparison. The Federal Court of Justice has been offering banks this option since 1997.

In the active-active comparison, the bank is assumed to lend the money that it now receives back to another customer as a loan. In the active-active comparison, the prepayment penalty comes from the interest margin damage and the interest rate deterioration damage. The latter reduces the damage suffered by the bank or can even compensate for it if interest rates for reinvestment have fallen. The interest margin damage compensates for the profit that the bank has missed.

If the bank chooses the asset-liability comparison, it can calculate the prepayment penalty, even if the interest rate level has remained unchanged or may even have increased. In the asset-liability comparison, the money that now flows back prematurely is invested in the secured capital market paper.


Transparency for the borrower

Prepayment penalty: active-active and active-passive comparison

Whatever the basis for the prepayment penalty, the bank must list and document all parameters that are included in the calculation. This makes this often complex process more transparent for the borrower and he can lodge an objection in the event of an eventuality. If the bank’s prepayment penalty turns out to be too high, the borrower can plead for reimbursement. This right also applies to old cases of prepayment penalties.


Allow special repayment rights as a borrower!

So that something like a prepayment penalty does not fall due for early termination or at least limit the amount, the borrower must be granted a right to make special repayments. This right to free special payments is also recorded in the loan agreement. This right also gives more flexibility with regard to the repayment of the loan and in the event of early repayment of the loan amount, the bank cannot grant an excessive prepayment penalty.

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