In this post, I will tell you about loan refinancing. You will learn what refinancing is, who needs it and why, how it happens, what the borrower benefits from it, and whether it is worth refinancing debt at all. Let's start from the beginning, everything in order.
Refinancing a loan is the refinancing of a borrower in another bank, that is, in fact, issuing a loan to repay another existing loan. If the borrower has a secured loan, then during refinancing the pledge is transferred to a new creditor bank.
Many confuse or equate refinancing and restructuring, but these are completely different concepts, since it is only a change in the existing terms of a loan agreement in the same bank, and refinancing is the issuance of a completely new loan in a new bank.
Refinancing loans from other banks has become widespread relatively recently as a result of competition between financial institutions. In the struggle for customers, banks began to lure borrowers from each other, first with high-quality ones, then even with bad ones.
It is clear that debt refinancing is another bank lending program that allows the bank to attract new customers, which means to increase its income. At the same time, the borrower can also benefit from refinancing. There are 3 main categories of borrowers who most often want to refinance a loan at another bank:
1. Those who want to reduce their loan payments. It happens that when receiving a loan, a person chose not the most, and only then realized that he could pay significantly less on his obligations. The bank in which he took a loan is unlikely to reduce the interest rate and commission, so you can refinance the debt in another bank on more favorable terms.
2. Those who want to increase the amount of the loan. This option applies to secured loans. Let's say a person has borrowed money to buy real estate, has already paid off, say, half of the debt, but then he needs money for some other purpose. If the creditor bank does not want to increase the loan amount, then a competitor bank can do this by refinancing the debt and providing a larger loan amount that is covered by the existing collateral.
3. Escaping from delays. In some cases, borrowers who have problems with repayment are in a hurry to resort to refinancing. Not all banks will go for such refinancing of the loan, however, there may be those who will agree to refinance the overdue debt if the borrower can prove that he is solvent.
Initially, debt refinancing was more often used for, but later it became widespread for private lending programs: mortgage,.
To refinance a loan from other banks, you should collect a standard package of documents provided for by the loan programs of a new banking institution, as well as documents confirming the availability and quality of servicing existing debt:
– Loan agreement and repayment schedule;
– Pledge (mortgage) agreement, an act of agreeing on the value of the pledge, if the loan is secured;
– A certificate of the current state of debt on the loan, the presence or absence of delays;
– Receipts confirming the repayment of existing debts.
Different banks may have different requirements for documents for refinancing a loan, so, of course, it is better to clarify this issue individually in a particular bank.
The procedure for refinancing a loan is also regulated by the internal regulations of each particular bank, but in general, the following key stages of debt refinancing can be determined (we denote the bank in which the loan is available - Bank 1, and the bank in which the borrower wants to refinance - Bank 2):
1. The borrower seeks advice on refinancing a loan from Bank 2, receives a preliminary consent to consider his application;
2. The borrower collects the required documents for loan refinancing and submits to Bank 2;
3. Bank 2 considers the application and makes a decision at the credit committee on the possibility of refinancing the debt on the loan;
4. The Borrower notifies Bank 1 of its intention to carry out (in this case, the consent of Bank 1 in principle is not required);
5. On the day of the transaction, the borrower signs a loan agreement with the Bank 2 and a new repayment schedule;
6. Bank 2 issues a loan, in most cases - by transferring the amount to repay the debt to Bank 1. If the amount of the new loan is greater, then the amount to be repaid is transferred, and the rest is issued in another way agreed with the borrower;
7. The borrower receives a certificate from Bank 1 stating that the loan is fully repaid and there is no debt on it, and submits it to Bank 2 as confirmation of the intended use of the loan for refinancing;
8. If the loan was secured - Bank 1 removes the arrest from the pledged property;
9. The borrower signs a pledge (mortgage) agreement with the Bank 2;
10. Bank 2 imposes its arrest on the pledged property.
That's it, the loan refinancing procedure has been fully completed, and then the borrower repays it to a new bank, in accordance with the signed agreements and schedules.
Now you know how loans from other banks are refinanced, who can benefit from it, and what documents you need to provide for this.
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Funds However, in the context of a significant increase in public debt and growing budgetary difficulties, the country may also resort to refinancing public debt. Refinancing refers to the repayment of old government debt by issuing new loans. For example,
Refinancing government debt simply means reallocating debt - selling new bonds to pay off old ones.
It soon became apparent that refinancing the public debt was a seemingly insoluble problem. The IMF program assumed that domestic holders of securities would renew (reinvest) them when they fell due; the only question was at what price. If the government were able to successfully collect taxes, then interest rates would eventually fall to an acceptable level, say 25%, and the crisis would end. But in this reasoning, the IMF specialists overlooked the fact that a significant proportion of the bonds belonged to domestic holders, who could resume buying GKOs that were expiring at any price. Companies were forced to pay taxes, but they could no longer reinvest the corresponding amounts in GKOs. More importantly, however, the banking sector, with the exception of the state-owned Sberbank, bought GKOs with borrowed funds. Due to the decrease in activity in the stock and bond markets, most banks became insolvent, and those that were still solvent were unable to renew their credit lines. As a result, they not only ceased to be buyers, but were forced to liquidate some of their assets in order to make margin deposits. A significant part of the funds was borrowed from foreign banks, some of these banks even tried to withdraw their funds. The massive dumping of Russian dollar-denominated debt caused them to depreciate to an all-time low. A full-blown banking crisis unfolded.
Special bond issues. To reduce the budget deficit and attract public savings to finance and refinance public debt, many Western countries resort to issuing special loans intended for placement in insurance and pension funds, as well as government agencies. Bonds of such issues are not sold, they cannot be transferred to other persons, but they can be presented for payment after a certain time (usually a year) from the date of their issue.
Refinancing of the public debt is the payment by the government to the owners of maturing government securities of money received from the sale of new securities, or the exchange of redeemed securities for new ones.
Refinancing of public debt is the placement of new government loans to pay off debt already issued. The minimum price of borrowed funds in the market I is determined by the refinancing rate.
Refinancing of the public debt
Public debt refinancing (22)
Through the distributive function, government spending of a capital nature (for example, on the construction of a high-speed highway Moscow-St. Petersburg) or to cover the budget deficit is more evenly distributed over time. Servicing of the public debt comes at the expense of taxes, profits from the operation of the constructed facility, placement of new government loans, i.e., refinancing of the public debt.
In connection with the large-scale devaluation of the ruble in 1998, associated with the imbalance of all the main indicators of the financial market, the Government of the Russian Federation, together with the Central Bank, took a number of anti-crisis measures. In particular, the Central Bank repeatedly increased the refinancing rate and refused to support it. The Government of the Russian Federation has adopted a program for the restructuring of the state debt. When forming benchmarks for inflation rates in the forecast for 1998-1999. the conditions that caused a new round of inflation in the consumer market and in the markets for industrial and technical goods, investment goods, as well as in the field of market and non-market services will be taken into account.
Refinancing is actively used in the payment of interest and repayments on the external part of the public debt. However, an indispensable condition for the provision of new loans is the good reputation of the debtor country in the circles of the international financial market, its economic and political stability.
Refinancing. There is no reason why the public debt should decrease, much less disappear. When the monthly due date for a portion of the debt comes up, the government usually doesn't cut spending or raise taxes to pay off bonds that have expired. (We know that in a weakened economy, such fiscal policy would be misguided.) What the government is actually doing is refinancing its debt; it's selling new bonds and using the proceeds to pay the holders of redeemable bonds.
Key question. Discuss two ways of estimating the size of the public debt. How domestic debt differs from external debt What are the consequences of paying off domestic debt A foreign debt Explain the difference between paying off and refinancing debt.
The yield of GKO throughout the year was one of the key macroeconomic benchmarks, along with such an indicator as the refinancing rate. By the end of the year, the efforts of the Central Bank and the Ministry of Finance to create an effective mechanism for attracting non-residents to the GKO-OFZ market were reflected in a decrease in bond yields and, thereby, the cost of servicing domestic public debt in terms of these government securities. If at the beginning of 1996 the rate of return on GKOs, weighted by all issues in circulation, was more than 100% per annum, in June it reached 170%, then by the end of the year the yield fell to 30-35%.
The state faces the most important task, on the one hand, to interest potential investors in high yield and liquidity of government securities, on the other hand, to reduce the costs associated with servicing public debt, since the costs of placement, refinancing, payment of income and repayment of debt obligations are carried out at the expense of state budget.
Refinancing of state or municipal debt - repayment of accumulated debt by placing new loans.
public debt by issuing new short-term obligations 2) the sale of new securities by the company in order to use the money received to withdraw existing securities from circulation. Provides cost savings on interest payments, extension of the loan repayment period.
First, it is the use by the government of the authority to refinance the debt. The government, in their opinion, has no reason to reduce the public debt or completely eliminate it, because it has the opportunity to refinance its debt, i.e. sell new bonds and use the proceeds to pay the holders of the redeemed bonds.
REFINANCING - 1) repayment of public debt by issuing new loans 2) mobilization of resources by commercial banks to cover loans or current lending. The need for R. is due to the transformation of short-term deposits into medium- and long-term loans, typical in the daily activities of banks, as well as maintaining the required level of liquidity, including the balance sheet, especially before the end of the operating year. As sources of R. banks use the funds of central banks, as well as the resources of the interbank market, including the international (euro market) 3) one of the main methods of monetary policy of the central bank. Represents central bank lending to commercial banks, including rediscounting of bills.
The reverse side of the coin of the state securities market open to non-residents was revealed at the end of October 1997. The crisis in the financial markets of Southeast Asia led to a sharp outflow of foreign capital from the Russian market as well. As a result of the massive dumping of government bonds, their yield by the end of the year again exceeded the interbank interest rate and the refinancing rate. The central bank was unable to resist the increase in government bond yields through open market purchases for long. The resulting increase in the amount of money in circulation increased the pressure on the ruble exchange rate, which was already on an upward trend due to the outflow of foreign capital and the contraction of the trade surplus after the fall in world prices for the main exported goods. Therefore, the Central Bank had to not only almost double the refinancing rate, but also expand the boundaries of the currency corridor by a third. This is how the ironic paradox, as P. Samuelson called it, showed itself, the presence of a large public debt increases the strength of the Central Bank, providing wide maneuvers in the money market, but at the same time, the possibility of checking
At the same time, the Savings Bank behaved strangely, the special status of which is determined by the fact that the controlling stake in its shares belongs to the Central Bank of Russia. As the largest holder of government securities after the Central Bank, the Savings Bank refused to refinance its portfolio of government bonds that were due in the second half of July, thus contributing to the collapse of the domestic government debt market. The originality of this act was even noted in the IMF report on the financial crisis in Russia.9
The government of V. Chernomyrdin, who was in power at the beginning of the Asian and Russian financial crisis, managed to use two different models of financial policy. In the first two months, the government continued to borrow heavily on domestic and foreign financial markets, while the Central Bank maintained both interest rates (by purchasing government securities on the open market) and the exchange rate (due to constant interventions in the foreign exchange market). In the next four months, the government slightly reduced the level of borrowing, limiting itself to refinancing repayable debt, and the Central Bank switched completely to supporting the exchange rate, without having a direct impact on the level of interest rates.
The government's plans actually implied the need to fully refinance the main part of the state debt through new loans and cover interest payments from budget revenues - a zero primary deficit. But it was clear that even if large investors continued to support the market, an outflow of small investors was inevitable, and either faster adjustment of fiscal policy or large loans from international financial institutions was needed to prevent a debt and currency and debt crisis.
The announcement of the Bank of Russia on July 24 to reduce the refinancing rate was perceived by financial market participants as an untimely and hardly explicable measure, even taking into account the loans provided by the IMF. It did not reverse the pessimistic mood - the demand for foreign currency was already quite high and had a tendency to further growth. The situation worsened, the turnover on the foreign exchange market quadrupled. Since the end of July, the Bank of Russia again had to resort to foreign exchange interventions in order to stabilize the situation. In general, in July, the reduction of the CBR's foreign exchange reserves due to ongoing interventions amounted to 3.2-3.7 billion dollars, which practically corresponded to the received credit resources, taking into account payments on the state debt.
If we analyze the structure for 2006, then it is planned to raise 238.2 billion rubles by placing government securities on the domestic market. when redeeming government securities in the amount of 68.4 billion rubles. Thus, the net balance in attracting government securities in 2006 will amount to 169.8 billion rubles. At the same time, it should be noted that in 2006 it is not planned to reduce the volume of public debt. For this reason, repayment of the current debt will be carried out through refinancing. The proceeds from the privatization of federal property and land plots should amount to 31.0 billion rubles in 2006, respectively. and 8 billion rubles.
One of the widely used methods is the refinancing of public debt, i.e. repayment of the main debt and interest at the expense of funds received from the placement of new loans. Successful application of the refinancing mechanism requires a high financial reputation of the borrowing country. Its achievement and maintenance is an important factor for public debt management. Currently, the reputation of borrowers in the global financial market is expressed in ratings assigned to the respective country by special agencies in accordance with international rating rules.
REFINANCING OF PUBLIC DEBT - repayment of old government debt by issuing new loans, mainly by replacing short-term obligations with long-term securities. Synonym - refunding.
The payment of income on loans and their repayment are usually made at the expense of budgetary funds, but in the context of a constant increase in public debt, the state may resort to refinancing, i.e. to pay off old government debt by issuing new loans. Refinancing was repeatedly used in our country, in particular, when paying off debt on a state three-percent domestic winning loan in 1966, as well as when issuing state treasury bills in the mid-1950s. Refinancing is used to pay interest and repay the external part of the public debt.
Could the state have foreseen in advance the results of high taxes, the exorbitant refinancing rate, the pyramid of state treasury obligations (GKOs), the admission of Western capital to the GKO market In principle, it should have been foreseen. And at the same time, economic science has not developed a mechanism for a comprehensive study of the economy. The category of the country's money economy is designed to fill this gap. This does not mean that it is enough to know the mechanism of the impact of this generalizing category on the reproductive process, and our public debt will be reduced, inflation will stop, and the problems of the agrarian and military-industrial complexes will be solved. Of course, none of this will happen. But when economic science considers finance and credit to be different categories and does not try to establish their mutual influence on reproduction, decisions are made as a result of which Sberbank becomes an ordinary commercial bank. It is known that the system of savings banks is guaranteed by the state because
Many banks lure with offers to refinance existing loans under more favorable terms. You can also find another name for this service - on-lending. Let’s take a look at what loan refinancing is and how to apply for it.
When applying for a loan, borrowers are usually interested in two questions: what will be the overpayment, or for what maximum period can the contract be concluded. Most banks do not offer the most comfortable conditions for new borrowers, since the risks of non-payment on such loans are higher than in cooperation with existing clients. Therefore, the bulk of the contracts are framed on standard terms. For example, in 2015, it was possible to take cash at 25-30% per annum, in 2016 - 20-25% per annum. Today you can find offers from 12% per annum for standard programs and from 13.5% for on-lending programs.
Debt refinancing solves problematic issues both for the bank and for the population. On the one hand, the bank receives a time-tested client, and, on the other hand, the borrower eases the loan burden through a new agreement. In other words, what is an on-lending of a consumer loan - this is the execution of an agreement for a new consumer loan, the purpose of which is to repay existing debts in other banks.
As in standard loan products, basic conditions are inherent in refinancing - term, amount and interest rate. Loan terms, as a rule, do not exceed 5 years. Extending the term of the contract allows the borrower to reduce the payment. This option is often used by the banks themselves during restructuring, if the client's financial situation has changed and he is unable to service his debts.
A fair question arises, restructuring and refinancing a loan - what is the difference? The first procedure is carried out within the framework of the existing agreement, when the conditions for further repayment of the debt and possible solutions to the problems that have arisen are reviewed, namely:
Refinancing is the signing of a new agreement with the establishment of new parameters (interest rate, term and amount of the loan). The amount of refinancing can be equal to the debt on one loan or several at once (VTB 24 - up to 6 loans, Sberbank - up to 5). Also, some banks add a certain part of the money for personal needs. For example, VTB 24 and Sberbank offer refinancing for 3 million rubles, and Rosselkhozbank - for 1 million rubles. In addition, Sberbank can give up to 135 thousand rubles. for personal purposes, if necessary, the borrower.
The annual rate can be either fixed for all clients or be assigned depending on the personal parameters of each borrower. For example, in VTB 24 - it is in the range of 14.5-15%, in Sberbank - from 13.9 to 14.9%. Rosselkhozbank, on the contrary, indicates only the initial value - 13.5%. When only the minimum value of the rate is indicated, there is a high probability that after the application is submitted, it will be several times higher.
Please note that if the difference between the current rate and the new one is less than 2%, then it is not advisable to start refinancing.
Banks carry out on-lending of various loans: consumer, mortgage, automobile, credit line cards. As a rule, if the previous contract was executed with the provision of security, then a new one is drawn up along with it. There are options to replace the collateral with a surety or vice versa. You can also find banks where collateral is not required when concluding a new contract (Sberbank, VTB 24).
The benefit that the new interest rate promises may be leveled due to significant costs for registration of collateral (registration of encumbrance, independent assessment, notary services). In this case the difference in the annual rate must be at least 4%.
As you can see, lending conditions are more than acceptable, so many borrowers may be at a loss why refinancing a loan is so beneficial, what's the catch? There is one weak point in the whole procedure, but it does not relate to the execution of a new contract, but rather to the closing of the old one. When applying for on-lending, you need to have the exact amount of debt under the existing agreement. To do this, it is necessary to write an application to the bank for early repayment of the debt. Based on the official notice, the creditor bank will recalculate the debt based on the date on which the funds will be deposited (it is indicated 7-10 days in advance so that there is time to process documents in the new bank).
Application example
If you do not draw up such an application, the bank may not close the credit account, but continue to deduct from it on a monthly basis the amount corresponding to the minimum payment. Subsequently, this may lead to the formation of delays. Another negative aspect of the absence of an application is the possible imposition of penalties for non-compliance with the procedure for early closing of the loan.
If with a regular loan the bank puts forward requirements only for potential customers, then with refinancing it is important that the condition of the open loan also meets the conditions of the new lender. Typical requirements for the borrower are:
Other conditions are also possible: territorial affiliation to a particular region, the minimum level of income, the presence of a salary card or a bank deposit, etc.
What you need to refinance a loan from the requirements for an existing agreement:
Since many banks are engaged in on-lending various loans, another important point is the intended purpose of credit funds. You cannot refinance a mortgage under a consumer lending program.
It should be noted right away that refinancing a consumer loan is a rather lengthy procedure, insofar as it is a question of obtaining a new loan, the borrower will have to spend some time collecting documents, submitting an application and waiting for a response, then applying for a loan and repaying a loan in other banks. For the entire period of paperwork, you need to conscientiously fulfill your obligations to other banks and repay existing loans.
It is worth starting with studying the services market insofar as this financial product is offered by many commercial banks, for example, Rosselkhozbank, Sberbank, Raiffeisenbank and others. All offers differ in interest rates and other conditions. First of all, when choosing a product, you should pay attention to interest rates. For example, if you pay a consumer loan at a rate lower than you are offered a loan for refinancing, then refinancing in this case will be meaningless.
So, after you have decided on the bank, you need to collect a certain package of documents. As a rule, this is a passport and a salary certificate, a document confirming employment, they should be transferred to the bank along with the application form. Within a few days, the bank will make a decision for you: positive or negative. At the same time, you can immediately find out the interest rate that will apply to your loan agreement.
If you are completely satisfied with the terms of the loan, you should contact the bank where you currently pay off the consumer loan and apply for early repayment of obligations. This must be done, as required by law, at least 30 days before the date of the proposed payment.
Please note that a positive decision in the bank where you carry out on-lending is valid for approximately 90 days (it is worth clarifying separately), so the on-lending procedure should begin with choosing a bank and submitting an application.
After you have written an application for early repayment of the loan, you need to apply for a refinancing loan at the bank and sign a loan agreement. Your further actions will depend on the conditions of the financial institution that refinances the loan, for example, some banks themselves transfer money to your creditor to pay off debt obligations, others, on the contrary, issue cash, for the intended use of which you will later have to report.
By the way, it cannot be said that if your current consumer loan is issued with collateral in the form of collateral or a guarantee, then you need to re-register the loan documents for refinancing. Although some banks do not require this. Also, do not forget about refinancing loan insurance, without it the bank will raise the interest rate for you and there will be no point in refinancing either.
For registration, you will need: a passport, documents showing the financial situation of the borrower, a loan agreement / certificate with the full cost of the loan, as well as documents on collateral, if any. The credit scheme looks like this:
The application is considered no more than 2-5 days. To increase the likelihood of a positive decision, you need to provide as many documents as possible. For example, checks from payment of monthly contributions, certificate of SNILS, TIN, passport, certificates of ownership of property, etc.
Such a situation as an overdue debt to a bank is no longer a rarity today, but all the same, all conscientious payers are looking for an option through which they can resolve the debt issue without litigation and other troubles. Unfortunately, the bank often refuses to work with clients who have a negative credit history and are in arrears with other creditors.
However, banks compete with each other and may make concessions to the client in order to attract profit. There are a number of banks that consider an application from borrowers with existing delinquencies before other banks, consider the list:
Just keep in mind that each individual application is considered individually, the bank may refuse to refinance without explaining the reasons. However, every borrower should remember that the delay must be no more than 90 days from the date of the last payment. In addition, the case should not be taken to court and sold to collectors, so if life circumstances are such that there is nothing to pay the loan, it is better to think about refinancing in advance or ask the bank to restructure the debt.
Do not confuse two different concepts of refinancing and debt restructuring, because restructuring is a change in the terms of an existing loan agreement, and therefore, the bank extends the loan term in order to reduce the monthly payment and reduce the financial burden on the borrower.
The question of whether refinancing is profitable or not is quite complicated, because you, in fact, apply for a new loan and will again have to pay in accordance with the payment schedule, that is, this procedure will not release you from credit obligations. However, refinancing has a number of advantages, first of all, if you have several loans in different banks, then you transfer them into one loan, you will need to pay one bank once a month, which, of course, is already more reasonable for the borrower .
Another benefit of refinancing is that if you choose the right bank, your monthly payment will be lower than what you paid before. That is, it is beneficial only if the condition is that the interest rate on the refinancing loan will be lower than the current one.
The third advantage is that you can independently choose the amount of the monthly payment, that is, the bank will offer you to conclude an agreement for a period, for example, from 1 year to 10 years, respectively, the longer the term, the lower the amount of the monthly payment. You can choose such a period, monthly payments with which will be as comfortable as possible for you and for your budget.
Finally, there is another advantage - the borrower may not reduce the amount of the monthly payment, but reduce the amount of the overpayment by reducing the loan terms. Although, on the other hand, any loan can be repaid ahead of schedule, including a loan for refinancing - this is not prohibited by law, and no fee is charged for the procedure.
To summarize, what is consumer credit refinancing? In fact, this is a new bank loan, the funds of which can only be used to repay your existing loans. The profitability of this operation is determined individually, that is, in some cases, refinancing does not make sense at all, especially if the refinancing loan rates are higher than the current value.
