Purchase of credits: operation and principle

Buying back credits makes it easier to repay and simplify the management of your personal finances. Its objective is to lighten its monthly payments by benefiting from a better rate of credits and, possibly, in return for the extension of the duration of the loan .

The purpose of the credit buy-back is to reschedule repayments to better adapt them to its current situation. The grouping of loans also contributes to freeing up a remainder to live in the service of debt reduction and to include in the new loan cash in order to finance new personal projects. Back on the assets but also the pitfalls to avoid in the repurchase of credits.

How does a loan buyback work?

How does a loan buyback work?

The principle of the repurchase of credits is to restructure its debts in order to find financial room for maneuver. A loan repurchase, also called grouping of loans, consists in borrowing in order to redeem all the credits in progress (personal loan, real estate credit, assigned credit, revolving credit, etc.) but also bank debts like an overdraft.

There are many advantages to buying back credits:

  • Adjust the amount of the due date . A redemption of credits may lead to the same repayment duration being extended, lengthened or shortened. This great modularity makes it possible to adapt the monthly payments to the situation of each borrower.
  • Decrease the interest rate . The purpose of this receivables restructuring procedure is to reduce the monthly repayment. The operation can also be profitable by winning a more attractive loan rate than the loan rates initially taken out.
  • Simplify the management of your budget. The repurchase of credits is also used to deleverage and to clarify its budgetary situation by having only one claim to manage.
  • Finance a new project. The grouping of loans also offers the possibility of freeing up cash to finance a personal project such as the purchase of a car or the payment of work in a dwelling.

In return for these advantages, the duration of the credit can be extended. It is also necessary to take into account the costs of buying back credits, and therefore the overall cost of the operation because there are pitfalls to avoid in buying back credits.

Buying back loans is therefore a solution to consider when the economic situation leads to a decrease in interest rates, when the personal situation (unemployment, transition to retirement, accident in life, etc.), family (marriage, divorce , birth, etc.) and heritage changes (inheritance, rental investments, etc.).

But you have to take into account all the elements (amount at stake, debt ratio, remaining to live, inherent costs, etc.) to know if it is an opportunity to be seized or not.

Which loans are eligible for loan repurchase?

A loan buy-back operation allows a wide variety of credits to be grouped together:

  • Home loan;
  • Unallocated personal loan or consumer credit;
  • Credit allocated to works, cars, etc. ;
  • Revolving loan.

Depending on the proportion of each type of credit, the repurchase of loans may be subject to the regulation of home loans or personal loans.

What are the advantages of buying back credits?

What are the advantages of buying back credits?

Although the overall cost of the operation is higher, the advantage of buying credits is obvious in several situations:

  • Increase the rest to live

The repurchase of credits is used to reduce the debt ratio to increase the remainder to live. The weight of the credit is smoothed over time, offering a breath of fresh air to subscribers in a delicate financial situation. They make a better end of the month and can save again and make new projects.

  • Remove revolving credits

Revolving loans have very high interest rates (up to 20%) as far as they are indexed on the stock markets, which are therefore variable. Their duration is also theoretically unlimited, creating dangerous situations for borrowers. By buying up revolving credits to make it a simple classic loan, the rates are again fixed and lower, and the overflows limited.

  • Avoid falling into over-indebtedness

The filing of an over-indebtedness file automatically leads to registration with the FICP (national file of credit repayment incidents to individuals). The duration of this filing at the Banque de France is 5 years, with possibilities to get out of it by regularizing your situation with your creditors.

However, during this time, it is very complicated to borrow. The repurchase of credits can prove to be the ultimate solution not to fall into this vicious circle on condition of correctly quantifying the cost of the operation.

How to decrease the amount of his credits?

Consolidating loans is not a magic recipe, although it offers obvious advantages when all the criteria are skillfully under-weighed during the upstream reflection.

It must always be borne in mind that the repurchase of credits is not free and that its cost can greatly reduce the profitability of such an operation, or even be more costly in the end.

We must therefore be vigilant and not only take into account the proposed interest rate. The total cost of the credit must be studied as well as the APR (annual effective annual rate). The latter is an excellent indicator for comparing two propositions together.

However, after a loan repurchase, it is possible to obtain a reduction in the amount of the monthly payment thanks to a reduction in financial conditions and / or an extension of the duration of the loan.

Example: a borrower owes $ 1,500 over 5 months with constant monthly payments, in this case $ 300. If the term of the loan is extended to 15 months, the monthly payment will only amount to $ 100. This is the principle of buying back credits in its most simplified formula.

However, the redemption of credits also includes their interest. The capital borrowed is therefore equivalent to the sum of the capital borrowed, to which is added the sum of the interest on loans in progress, before subtracting the amount already repaid. In addition, to calculate the overall cost of the operation, it is also necessary to add the interest calculated on the basis of the rate and duration of the repurchase of capital loans.

How to simulate online credit redemption?

How to simulate online credit redemption?

In order to determine whether a loan buy-back can benefit you, it is possible to carry out simulations directly on the internet. This allows you to anticipate and best prepare your request before an appointment with a broker or a bank advisor.

To carry out a loan repurchase simulation online, you need to have loan contracts and loan amortization tables that you want to group together.

Indeed, the capital to borrow will be the sum of the remaining capital due, the early repayment indemnities and ancillary costs (for example mortgage guarantee costs). You will have to subtract from it any contribution you wish to make and add the amount of the additional project (work, marriage, travel, etc.), if necessary.

With all this information, a simulator allows you to estimate the monthly loan payment according to different durations and to select precisely the future terms of the loan.

Example of a loan buy-back

Example of a loan buy-back

Here is a fictitious example which allows us to better understand the workings of a credit buyback operation.

Durand has monthly income of $ 1,500 net and faces 3 credits being repaid:

  • a consumer loan with a monthly payment of $ 400 and an outstanding capital of $ 6,000;
  • a consumer loan with a monthly payment of $ 300 and an outstanding capital of $ 10,000;
  • a revolving credit with a monthly payment of $ 100 and a reserve always available in the amount of $ 4,000.

His initial situation is therefore as follows:

  • debt of $ 20,000;
  • sum of the three monthly payments of $ 800;
  • 700 $ to live on;
  • debt ratio of 53.3%.

A lending organization offers to buy back the credits repayable over 3 years for a cost estimated at $ 2,500.

After buying back credits, the situation is now as follows:

  • debt of $ 22,250;
  • a single monthly payment of $ 618;
  • remains to live of 882 $;
  • debt ratio of 41.2%.

Although more indebted, the borrower’s situation has improved mainly thanks to the abolition of revolving credit. The repurchase of consumer credit is profitable in this case and allows to find a monthly loan closer to debt standards (as a reminder, about 33%).

How to buy back consumer credits?

A consumer loan repurchase can be done with specialized financial organizations, banks or a broker. By combining several consumer loans, and in particular revolving loans, the borrower can make serious savings thanks to a better interest rate. Obviously, it is possible to add an additional envelope to finance a new project.

Concerning personal credits to be reimbursed, early repayment indemnities may have to be paid if the repayment relates to an amortizable loan and the amount of the operation exceeds $ 10,000 (over 12 months). However, bank overdrafts and revolving credits are never subject to the payment of these penalties. The amount of these varies according to the remaining term of the loan:

  • The loan ends in less than a year: 0.5% of the amount reimbursed;
  • The loan ends in more than a year: 1% of the amount repaid.

How to buy a mortgage?

In a context of low interest rates, many borrowers are moving towards a repurchase of mortgage loans. The difference with a repurchase of consumer loans is then essentially located at the level of the early repayment indemnities. Except in cases of exceptional exemption stipulated in the loan contract, the borrower must pay to his previous bank:

  • 3% of the remaining capital due;
  • Or 6 months of interest on the principal repaid at the loan rate.

Once the two calculations have been made, the amount to be paid will always be the lowest.

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