Redeeming credits: pitfalls to avoid


Interest rates are still very low, too many credits stifle the household budget, the monthly repayments are too heavy, in short many reasons can be used to discuss the purchase of credit to find a solution. This financial transaction makes it possible to redeem some or all of the outstanding loans by a bank or an organization specializing in the redemption of loans. It is a question of making of this process a real step of restoration in financial situation serene, by lengthening the duration of repayment and reducing the amount of the monthly payment, while the rate of interest can be revised downwards. But beware, this operation carries risks, but also traps, here are some tips to avoid them.

Should we focus on the interest rate?

Most people who start a buyback process do so because they are convinced that the main objective of this action is to lower the interest rate at all costs. And sometimes, wrongly, they think they will make big savings and especially reduce the amount to borrow. But for the operation to be interesting, the difference between the old rate and the new one must be at least 0.7 point. Grabbing a few tenths of points is therefore strictly useless, because the costs of a redemption of credits are to be taken into consideration. In the end, the operation may cost more than the savings.

Many borrowers unfortunately fall into the trap of fees that have not been fairly well evaluated. Because if a credit buyback operation provides either to reduce the monthly payment, or to reduce the repayment period, the costs that can result can sometimes be expensive. The application fees, for example, vary from 500 to 1,000 euros, to which will be added the IRAs ( prepayment indemnities ) which amount to a maximum of 3% of the outstanding capital. In addition to this list are the guarantee fees for the new credit subscribed, when there is real estate to be mortgaged: the costs of release and notary. Broker fees should also be included if the borrower decides to use the broker’s fee to help them find the best deal.

Good to know: prepayment fees can be negotiated or even removed under a new loan agreement. In summary, the gains must be greater than the cost of buying back credits.

Make an assessment of his solvency

The redemption of credits being a banking operation as such, the lending financial institution will look into different elements before agreeing. The first thing to do, then, is to examine one’s situation and to sift through certain criteria such as the employment situation. Financial stability is a key element in the loan consolidation process, and a CDI is an asset even though it is not mandatory. Proving a permanent situation even in fixed-term or temporary is also a possibility.

The second element of solvency on which the lender is going to be based is the repayment capacity of the borrower. The debt ratio, set on average at 33% by the banks, is in principle to be respected in a general way, except in a few exceptional cases. The repurchase of credits makes it possible to lower this rate, to buy back its mortgage for example, which represents sometimes the most important part of the expenses of the home, makes it possible to decrease the amount of the monthly payment by lengthening the duration of repayment.

Good to know: other household debts can also be included in a loan buyback transaction, such as rent or late taxes.

Some tips to avoid mistakes

One of the main pitfalls to avoid is to be seduced by the first offer received. After doing an online simulation, you should not be limited to one organization, but contact several to compete and especially compare their offers. Even when the borrower uses the services of a broker, it must be ensured that the broker works with several partners. Do not hesitate to consult the ORIAS which has a detailed register of all the non-exclusive intermediaries in finance.

It is important to be wary of offers that are too appealing, as they may be unsuitable for the household. A recent investigation by the Directorate-General for Competition has shown that many establishments are breaking the law. Between misleading advertising, undisclosed fees and the actual cost of the transaction not explicitly displayed, the dangers to the consumer are real, starting with the proposal of a variable rate that must always be refused. Above all, do not get carried away by an emergency, because it can lead to mistakes and the wrong offer.

When the purchase of credits includes additional cash, this must not be too large. Borrowing too much money in addition to the redemption of all outstanding credits extends the repayment term and increases the capital to be repaid. If borrowing a small, reasonable amount that can serve as security is recommended, the borrower may find himself more indebted than he wished by succumbing to offers too attractive at first.

Do not forget that in the context of the purchase of credits, it is the extension of the repayment period that reduces the amount of the monthly payment. But beware, this has a cost, since it entails an increase in the total cost of credit. It is therefore important to make several simulations with different durations to manage well its budget. For example, do not encroach on the repayment of the repurchase of credits over the period of retirement when the incomes automatically fall.

To compare offers to buy credits, always use the APR (annual percentage rate of charge) which includes all fees. Indeed, it allows to see exactly the differences between the proposals and especially to know which is the most advantageous. The interest rate, the insurance, the expenses of file, the expenses of guarantee are included there. Of course, before embarking on the comparison, you must have established the amount to borrow, which is an important step. To do this, it is necessary to check the remaining capital due, the debts to be included in the repurchase, all the expenses related to the repurchase and the amount of the additional cash.

Pay attention to the cost of insurance that must be carefully analyzed, because in some cases it can exceed the cost of interest. Be sure to read all the terms and conditions, as not all contracts offer the same guarantees. Bundled contracts have advantages such as risk pooling and simplified formalities. The delegation of insurance is also an option, it is an individual contract that is often cheaper especially before the age of 40 years.

Finally, read carefully the information document provided by the advisor who proposed the offer to buy credits. It allows to have a precise idea of ​​all the expenses related to the operation and of all the steps to be undertaken.

Good to know: each borrower has 10 days after receiving the offer of credit to sign it. Once the loan agreement is signed in due form, the borrower still has 14 legal days of retraction.

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