Despite the fact that practically all of us have or at least once in our lives had some kind of credit, there are still few people who understand certain concepts, quite strongly attributed precisely to the liabilities we incur. The ones we will deal with today usually only come up when we lose liquidity or get into financial problems. What is debt restructuring? What is a loan refinancing, and what is a rollover? Find the answers to these questions in the following article.
A word of introduction
There is a reason why we are dealing with these issues just today. After all, more and more people have recently begun to face significant increases in loan installments as a result of the central bank’s anti-inflationary measures. Recall at this point that the Monetary Policy Council is currently in a cycle of interest rate hikes, which negatively affects the interest rate on loans. The hardest hit are naturally mortgage holders, whose loan installments may have already risen by as much as 80 percent. This, in turn, causes them to start looking for solutions to reduce installments or precisely to restructure the loan. What does it consist of? We check.
What is credit restructuring?
Before we can touch on other issues related to possible measures to reduce loan installments or improve the liquidity of our household budget, it is necessary to describe in a few words the concept of restructuring. This is because it is the term that defines all the activities that are intended to lead to an improvement in our situation and easier repayment of the obligation.
After all, loan restructuring is nothing more than a change in the terms of the loan agreement, the main goal of which is to return to trouble-free and timely repayments. The concept of restructuring can be understood in several ways, as the consolidation of obligations can also stand behind it, but focusing only on one loan, it usually means, for example, the application of an extension, about which in a moment.
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When restructuring a mortgage, we can come to an agreement with the bank, which will result, for example, in the application of a credit vacation, i.e. postponing the payment of several installments (usually the principal part), extending the repayment period, which will reduce the amount of the monthly installment or even lowering the interest rate. However, a lot depends on the bank itself and its credit policy, as well as how the loan has been repaid so far. Banks are reluctant to restructure obligations from the beginning that have been repaid in a manner inconsistent with the agreement, or when small amounts are involved, for example.
What is a loan rollover and what to look out for?
As we mentioned earlier, a loan extension involves extending the repayment period of the obligation usually to reduce the amount of the monthly installment. After all, note that by stretching the borrowed amount into more installments, their amount will be slightly lower. Much depends here, of course, on the period over which you want to spread the commitment.
IMPORTANT: When deciding on a rollover to increase the number of monthly installments, take into account the fact that the bank will charge us additional interest. This is because these depend directly on the period during which we have the capital borrowed from the bank. The longer we repay our obligation, the greater the amount of interest the bank is entitled to charge.
Another form of rollover, i.e. extending the repayment period of the loan, is also a credit vacation, i.e. a break in the repayment of installments. Usually for a maximum of 3 months, but it all depends entirely on the credit institution. In most cases, credit vacations apply only to the principal part, which means that we have to pay interest to the bank during this time anyway. The situation is a little different when it comes to statutory credit vacations, which we faced during the pandemic period or even now, when the government has prepared a special shield for borrowers. This is because the current credit vacations apply to both the principal and interest portion. However, they are addressed only to mortgages.
What is a loan refinancing?
Loan refinancing, although it sounds rather mysterious, is not a particularly complicated issue. This is because in practice, refinancing means transferring the obligation to another bank, one that will offer better terms. It is quite common for people who decide to refinance a loan to automatically benefit from the possibility of extending the repayment period, i.e. the extension discussed earlier. This allows for a very favorable restructuring, which we have also already written about.
You should start refinancing a loan, such as a mortgage, by finding an offer that is more favorable than the one you used when you entered into the loan agreement. However, it is important to remember that what appears favorable at first glance is not always so. In order for refinancing to make sense, we need to check all the costs associated with early repayment of the loan at bank A, as well as all the fees and costs at bank B.
An independent credit expert, who has access to offers from many banks in Poland, can help you choose a cheap refinancing loan.