Refinancing an expensive old loan: Reduce interest rates and save hundreds of euros
23 Jul 2025
10
Minutes
Katrin Straub
CEO at nextsure
Are you paying too much interest on an old installment loan? Many borrowers waste hundreds of euros annually by sticking to outdated contracts. Refinancing an expensive old loan into a new agreement can significantly reduce your financial burden.
The topic in brief and concise terms
Refinancing is often worthwhile with an interest rate difference of just 0.2 percentage points and can save several hundred euros per year.
The early repayment fee for installment loans is legally capped at a maximum of one percent of the outstanding debt, which makes the costs predictable.
After ten years, most loans can be repaid free of charge thanks to a special termination right (§ 489 BGB).
Recognising Potential: When is an Old Loan Too Expensive?
An old loan is often more expensive than necessary when the interest rate at the time was significantly above the current market level. Even an interest rate difference of just 0.2 percentage points can make refinancing worthwhile. Especially with overdraft facilities, which are often charged at over nine percent, the potential savings are enormous. Check your contract: If the effective annual interest rate, for example, is five percent while new offers are at three percent, you're paying too much every month. With an outstanding debt of 15,000 euros, the difference is significant. Refinancing an expensive old loan into a new contract is therefore usually a smart financial move. A careful calculation of the early repayment penalty is the first step to determining the actual savings.
A thorough analysis of your current conditions is crucial to realizing the full savings potential.
The Debt Restructuring Process: Four Steps to a Cheaper Loan
Refinancing a loan follows a clear and straightforward process. With the right preparation, you can ensure a seamless transition. Here are the four key steps:
Determine the outstanding balance: Request the exact remaining balance from your current bank for the desired redemption date. Also, clarify any potential early repayment charges.
Compare offers: Obtain multiple offers for a new loan equivalent to the outstanding amount. Pay attention to the Annual Percentage Rate to compare total costs.
Conclude a new loan agreement: Once you have selected the best offer, finalize the new loan agreement. Many banks offer a switching service and handle the communication with the old bank.
Repay the old loan: As soon as the new loan amount is disbursed, the old loan is fully paid off. Most banks accept this repayment as a cancellation, while only a few require a separate document.
A common mistake is to cancel the old loan before the new agreement has been approved. Always wait for the confirmation from the new bank to avoid a funding gap. This structured process ensures you benefit from better terms, such as those possible through the refinancing of an expensive overdraft.
Cost and Savings: An Example Calculation
The financial attractiveness of a refinancing becomes clear through a specific calculation. Let's assume you have an old loan with an outstanding balance of 10,000 euros and a remaining term of 36 months at an interest rate of six percent. Your monthly payment amounts to approximately 304 euros. A new offer promises an interest rate of only three percent. The bank requires an early repayment penalty of one percent of the remaining debt, which is 100 euros. Thus, the new loan amount is 10,100 euros. With the new interest rate, your monthly payment drops to approximately 290 euros. Over the entire term, you'll save more than 500 euros in interest costs, even after the fee. The consolidation of multiple loans can even further enhance this potential for savings.
The calculation shows that even after deducting the costs, significant relief is possible.
Legal Framework: Notice Periods and Compensation
When refinancing a personal loan, the legal hurdles are manageable. The so-called early repayment penalty, which is the fee for early settlement, is legally capped. If the remaining term is more than twelve months, the bank may charge a maximum of one percent of the outstanding debt. For a shorter term, it is a maximum of 0.5 percent. This provides you with a clear basis for calculation. A special regulation applies to loans that have been running for more than ten years. According to § 489 BGB, you have a special right of termination with a six-month notice period, completely without compensation. This right cannot be contractually excluded and offers a great opportunity for interest optimisation. However, refinancing mortgages is often subject to different, more complex rules.
Knowledge of these legal requirements is crucial for successful and cost-efficient refinancing.
Requirements for a Successful Debt Restructuring
Banks assess similar criteria for a debt rescheduling application as they do for a new loan. A good credit score is key to success. Here are the main requirements:
Stable Income: A regular and permanent employment relationship is advantageous, and the probation period should be completed.
Positive Schufa Report: A high Schufa score signals to the bank a good payment history and increases the chances of approval.
Age of Majority and Residence: You must be at least 18 years old and have a permanent residence in Germany.
Existing Liabilities: The remaining debt of the loan to be replaced should generally exceed 1,000 euros.
Self-employed individuals often need to provide more detailed proof that their income is sufficient to cover the instalments. Good preparation and complete documentation significantly speed up the process and improve your negotiation position for debt settlement with a different bank.
Impact on Creditworthiness: How Schufa Responds
Debt restructuring can positively impact your Schufa score. If you consolidate several small loans into one, the number of your credit agreements is reduced, which is viewed positively by Schufa. A lower overall monthly burden also improves your creditworthiness, as the risk of default decreases. In the short term, a credit inquiry may slightly affect the score, but this effect is usually temporary. In the long run, successful and punctual debt restructuring leads to an improvement in your creditworthiness. This provides you with a better starting position for future financing projects. A clear financial overview through debt restructuring is therefore also a strategic advantage.
Request an individual risk analysis now: Have your insurance situation checked for free and receive concrete suggestions for optimisation.
More useful links
Bundesbank offers statistics on interest rates and yields for consumer loans to private households.
Bundesbank provides MFI interest rate statistics on stocks and new business.
Bundesbank provides information on current deposit and lending interest rates.
Statistisches Bundesamt (Destatis) offers datasets on loans and online transactions.
Statistisches Bundesamt (Destatis) delivers information on the consumer price index.
Verbraucherzentrale offers comprehensive information and saving tips on loans and credits.
Verbraucherzentrale NRW provides detailed information on loans and credits.
FAQ
What is debt restructuring?
Refinancing involves replacing one or more existing loans with a new loan. The aim is to benefit from better terms such as lower interest rates, reduced monthly payments, or an adjusted repayment period.
What costs are incurred when refinancing?
The main cost item is the early repayment penalty that your old bank charges for lost interest income. For installment loans, this fee is legally limited to a maximum of one percent of the remaining debt.
What documents do I need for a debt restructuring?
Usually, you will need the same documents as for a new loan: pay slips from the last three months, complete bank statements, a copy of your identity card, and the credit agreements for the loans to be repaid.
How long does refinancing take?
The process from application to the repayment of the old loan usually takes between one and three weeks. The duration depends on the speed of the banks involved and the completeness of your documents.
Can I also refinance a loan with residual debt insurance?
Yes, that is possible. By paying off the loan, you can cancel the associated residual debt insurance. Although you won't receive any refunds for premiums already paid, you will save on future insurance premiums.
Is it worth refinancing an overdraft?
Yes, refinancing an overdraft is almost always worthwhile. The interest rates for an overdraft are extremely high, averaging over nine percent. A personal loan is significantly cheaper and does not incur any early repayment penalties.
