If further financing needs arise after borrowing, topping up an existing loan can be the right decision. It may be better to take out a whole new loan and replace the existing loan with it, rather than having your current loan raised. The optimal solution also depends on the time elapsed since the last loan was taken.
Increase credit: These are the requirements
In order to be able to increase a loan, the borrower must be able to demonstrate sufficient creditworthiness. A credit increase is excluded in almost all banks, if the current loan is in default. Even though payment disruptions have occurred in the past six months, most banks are not willing to accept a higher loan.
In the run up to the credit increase, the same credit check is carried out as before the initial borrowing. This means that a flawless private credit information and a sufficient income are prerequisites for the commitment to increase the loan amount. Before the house bank is instructed to increase a current loan or to make inquiries at other banks, a current credit check should therefore be carried out.
First, a private credit self-assessment should be obtained to rule out (actual or incorrectly created) negative characteristics. Then there are more questions to answer. Has any of the borrowers changed jobs since the last loan? If so, is the new employment still in the probationary period? Has the direct debit account been chargebacked in recent months? Was the account overdrawn beyond the granted credit line? Ideally, all these questions will be answered with “no”.
Increase credit without bank transfer: That’s the way it works
The house bank will top up the existing loan if the borrower’s economic conditions allow it. This means, in particular, that despite the loan already in place, there must be enough room for maneuver in the monthly budget. Therefore, in the revenue and expenditure account, not only fixed costs (eg rent, utilities, motor vehicle, insurance) but also current loan installments and a reasonable amount for general living expenses are deducted from the income.
If the income available after deduction of these items is insufficient to increase the loan installment, the bank will reject the request to increase the loan. After a declined loan application, the credit rating tends to deteriorate, with the result that the chances for other banks are also falling. If the budget is tight, a different application should be made.
It is advisable in this case to recompile the existing loan and to choose a longer term. This reduces the monthly burdens, which increases the chance of a commitment from the bank. Here is a case study from practice.
In June 2017, a loan was raised for 25,000 euros for a vehicle. The conditions: 4% effective interest rate, three-year term and 737.30 euro monthly rate. After six installments, further financing needs emerge: 15,000 euros are needed for a new kitchen.
Instead of having the loan capped, the borrower can take out a larger loan, replacing the first loan and financing the kitchen. For the replacement of the old loan after six months 21.245,26 Euro are required: 21,034.91 Euro is the remaining debt after six months, the remainder is attributable to the statutory early repayment penalty of 1.0%.
Together with the 15,000 euros for the kitchen, 36,245.26 euros are needed. If this loan is also available at an effective interest rate of 4%, an extension of the term may allow the increase without increasing the monthly installment. Instead of 30 annuities of 737.30 each, 53 annuities in this amount and a final annuity of 506.15 euros are required.
Borrowing with bank bills can save you money
Above all, if a long time has passed since the last borrowing, a credit increase with bank bills may be worthwhile. A loan will be taken to finance the new acquisition and replacement of the existing loan. The change of bank is appropriate if the previous institution refuses to top up the loan or does not offer a favorable interest rate.
For an increase with bank bills, a credit comparison should first be carried out. Here are the usual rules: A low effective interest rate is the most important, but not the only criterion. Free special payments are an advantage. The comparison should also include loans with credit-based interest. This is especially true for borrowers with strong credit ratings.
The new bank will terminate and replace the old loan with the principal bank on time. The difference between the net loan amount and the redemption balance, including all interest and prepayment penalties, will be paid out and may be used freely. This combination of debt rescheduling and refinancing is particularly beneficial when interest rates have fallen since the last borrowing.
Here is a case study. An older loan has a residual debt of 15,000 euros. The conditions: 7.5% effective interest, three years remaining, 464.90 euros monthly. A total of 1,736.39 euros would be due for interest on scheduled repayments until the end of the term.
The objective: Instead of having the current loan capped, the loan will be replaced. In addition, 10000 € loan to be included. The monthly burden should not rise. At the same time, the absolute interest costs should remain moderate.
The solution: A loan of 25,000 euros at 3.5% effective with just under five years. The monthly rate can be kept constant at 464.90 euros. This annuity must be paid 58 times, in addition to a final annotation of 229.58 euros. The interest costs add up to 2,193.78 euros.
Less rate, faster debt free or extra cash with debt restructuring
To top up a loan and then pay a lower credit rate than before? This works, if with the increase amount another loan is sensibly replaced. Every successful debt restructuring offers basically three options. Firstly, the monthly rate can be reduced, secondly, the repayment term can be shortened and, thirdly, an additional disbursement can be generated. These three options will be explained below using concrete practical examples.
A loan with a residual debt of 18,000 euros will run for another three years. The conditions: 8% effective interest rate, 561.74 Euro monthly installment, 2,222.62 Euro total interest costs, no prepayment penalty on termination. The loan should be converted into a cheaper loan. The new loan is available at an effective interest rate of 3%. The interest rate is offered across all maturities.
Option I: The rate is kept constant and the runtime is shortened. Then there are 33 monthly installments of 561.74 euros and a final installment of 236.95 euros. The running time is reduced mathematically by about 2.5 months. The interest costs sink significantly to 774.37 euros. Possibility II: The running time is kept constant and the rate is reduced. At 36 months, the monthly rate drops to 523.14 euros. The interest costs sink to 833.07 euro.
Option III: An additional payout is generated at a constant rate and duration. Borrowers can use this option to increase their credit and generate additional funds to a limited extent. The load remains constant. The additional payout can be an alternative to a mini loan. In the example above, a payout of € 1,328.11 is possible without any changes to the installment or term.
Increase credit: Special features of the application
Most installment loans in Germany are given without earmarking and can be used for any purpose. Anyone who wants to increase a loan and thus finance a debt rescheduling should definitely state this in the application. Otherwise, the bank expects the new loan to be serviced in parallel with existing loans and underestimates disposable income in the budget. In the worst case, therefore, it comes to a rejection of the application alone.
Rejected loan: these options remain
If a bank customer wants to top up a loan and the bank rejects this plan, two options are conceivable. First, there is an attempt to persuade the bank of a commitment. Second, the application may be renewed at another institution.
Subsequent persuasion may consist in the addition of a second borrower. If the spouse also signs the contract, this will improve the prospects. However, this only applies if the second borrower also has a good credit rating.
If a new loan application is made to another bank, the rejected request (visible in the private credit) is available at the house bank. This basically worsens the chances of a commitment. Applicants should therefore compare the acceptance criteria of different banks and make a targeted application where certain characteristics such as: For example, self-employment can be assessed less negatively.