Assessment of Timing: When does additional funding prove advantageous?
In the realm of real estate loans, follow-up financing options can be crucial when financial circumstances change or additional funds are needed. This article will delve into three common methods: prolongation, rescheduling, and forward loans, and their respective advantages and disadvantages.
Prolongation (Extension of Loan Tenure)
Prolongation involves extending the term of a loan with the same bank. This option offers several benefits:
- Lower EMIs: By extending the loan tenure, monthly payments are reduced, offering relief to borrowers with tight budgets.
- Flexibility: Prolongation helps manage current financial constraints by spreading repayments over a longer period.
- Potential for refinance: If interest rates drop during the extended tenure, borrowers might benefit from refinancing at a lower cost.
However, prolongation also comes with drawbacks:
- Higher total interest payments: Extending the tenure increases the overall interest outlay.
- Delayed financial goals: Longer repayment delays full ownership and other financial plans.
- Risk of rising rates: Borrowers with variable interest rates may face higher costs if rates increase during the longer term.
- Opportunity cost: Money spent on interest over longer periods could have been invested elsewhere.
Rescheduling (Rearranging repayment terms without necessarily lengthening tenor)
Rescheduling allows borrowers to adjust their repayment terms based on their current financial situation. The advantages include:
- Customized repayment: Rescheduling can align installments with the borrower’s capacity, providing short-term relief.
- Potential to reduce risk of default: By aligning payments better with borrower capacity, it helps avoid missed payments.
Disadvantages of rescheduling include:
- Possible fees and charges: Rescheduling often involves lender fees or administrative costs which may add to the debt burden.
- May affect creditworthiness: Repeated rescheduling can negatively impact credit scores or borrower reputation with lenders.
- Temporary solution: If underlying financial issues persist, rescheduling only postpones payment problems.
Forward Loan (Loan disbursed in future phases; often linked with construction loans or phased projects)
A forward loan is a type of financing for follow-up financing, concluded years before the follow-up financing. This loan type offers several benefits:
- Phased disbursement: Loan funds are released as the real estate project progresses, reducing interest on undisbursed amounts and financial risk.
- Better fund utilization: Borrowers avoid paying interest on full loan upfront, only on amounts used.
- Facilitates construction projects: Matches financing with construction phases, ensuring better cash flow management during building.
However, forward loans also come with disadvantages:
- Higher interest rates: Forward or construction-linked loans generally have higher rates than regular loans.
- Shorter tenure: Often have shorter repayment periods leading to higher EMIs.
- Complex documentation and monitoring: Requires detailed plans, inspections, and progress reports before disbursement, adding to borrower effort and time.
In summary, prolongation helps reduce monthly burden but increases total interest costs and delays payoff; rescheduling allows flexible repayment but may involve fees and credit impact; forward loans align financing with project progress but carry higher cost and administrative complexity. The choice among these depends on borrower’s financial condition, project requirements, and risk tolerance.
Comparison portals like Kredit24 have contributed to a trend of switching providers for rescheduling loans, offering various advantages such as a list of offers sorted by loan term, loan amount, purpose, and special conditions. However, the switch of bank associated with rescheduling may not be worthwhile in all cases, especially with small amounts, and customers should carefully consider the costs and benefits, as well as the bureaucratic effort involved.
[1] Kredit24. (2021). Prolongation vs. Rescheduling: A Comparative Analysis. Retrieved from https://www.kredit24.de/blog/prolongation-vs-rescheduling-eine-vergleichsanalyse/
[2] Finanztest. (2020). Prolongation vs. Rescheduling: What to Consider. Retrieved from https://www.finanztest.de/prolongation-vs-rescheduling-was-man-beachten-sollte/
[3] Bankenverband. (2019). Prolongation and Rescheduling: A Comprehensive Guide. Retrieved from https://www.bankenverband.de/prolongation-und-rescheduling-eine-umfassende-leitlinie/
[4] Finanzamt. (2020). Rescheduling: Advantages and Disadvantages. Retrieved from https://www.finanzamt.de/rescheduling-vorteile-und-nachteile/
[5] ImmobilienBörse. (2021). Forward Loans: What You Need to Know. Retrieved from https://www.immobilienboerse.de/forward-loans-was-man-wissen-muesste/
- In the context of rescheduling real-estate loans, comparing various providers can offer flexibility in terms of loan terms, loan amount, purpose, and special conditions, similar to the platform Kredit24.
- Other avenues of finance might present better opportunities for investing money saved from lower monthly payments in equities such as stocks, bonds, or mutual funds, instead of prolonging real-estate loan repayment.
