Borrowed loans usually have a specific, contractually agreed, term. After this period has expired, it may be that the borrowed amount has not been fully repaid to the bank. This difference between the loan amount and the repayment amount is called residual debt. Theoretically, of course, the entire amount should be paid off at agreed rates during the term. Nevertheless, there may be incidents that confuse this schedule and produce an undefined amount of residual debt. By means of a residual debt insurance, borrowers can protect themselves for this risk.
Loans with residual debt
In general, there may also be types of loans or forms which have a residual liability at the end of the term. Very often, this is the case with mortgages, because there is usually a fixed interest period agreed. For example, this may only be 10, 15 or 20 years, but the contract is 30 years old. To get here now no problems, there are the so-called follow-up financing. In these, the remaining debt is repaid by means of a new financing. Borrowers do not have to do this with their current lender, but can also use another bank or credit institution. For example, when the interest conditions are better.
Rescheduling and residual debt
If one hears of a rescheduling, one can call the rescheduled amount as a residual debt. One hereby announces an existing loan and takes the existing remaining debt into a new loan. Banks, however, usually reserve the right to demand an early repayment penalty, ie money that compensates for the early termination. Of course, after paying this compensation the change still has to pay off. Otherwise, a change would be meaningless.
The creditworthiness check at the beginning of the loan also checks whether the borrower can afford the remaining debt after expiry of the fixed interest period. Of course, since one can not foresee exactly how the interest rate will develop over the next few years, one uses a debt service ratio. Usually you take a very high interest rate of 8%. If the borrower could afford this high interest rate on his remaining debt, this is a plus for the creditworthiness.
Payment protection insurance
Unemployment or death can be difficult to calculate, so that these cases can be covered by a residual debt insurance. The entire debt is even completely taken over by the insurance in the event of death. Relatives are thus protected. Borrowers are therefore recommended to take out this insurance directly with the loan. The monthly costs will be collected together with the installments. The insurances can be adapted here to personal needs and circumstances.
Loans without residual debt
Residual debts are more likely to occur with very long maturities than short-term small loans. No one can estimate 30 or 40 years and know what could happen within that time. Thus, the bank can not rely on how interest rates develop in the future. Fixed rates are therefore the norm, some banks actually only grant 10 years. To secure his credit but you can in addition to the insurance with an additional Construction who takes over the credit after this time.