Refinancing an expensive existing loan: lower interest rates and save hundreds of euros
23.07.2025
4
Minutes
Katrin Straub
Managing Director at nextsure
Are you paying too much interest on an old instalment loan? Many borrowers give away hundreds of euros every year because they hold on to outdated contracts.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
Debt refinancing often pays off with an interest rate difference of just 0.2 percentage points and can save several hundred euros per year.
The early repayment fee for instalment loans is legally capped at a maximum of one per cent of the outstanding balance, which makes the costs predictable.
After ten years, most loans can be repaid free of charge thanks to a special right of cancellation (§ 489 BGB).
Recognising potential: When is an existing loan too expensive?
An old loan is often more expensive than it needs to be if the interest rate at the time is significantly above the current market level. Even a difference in interest rates of just 0.2 percentage points can make refinancing worthwhile. Especially with overdraft facilities, which often carry interest of more than nine per cent, the potential savings are enormous. Check your agreement: if the effective annual interest rate is five per cent, for example, while new offers are at three per cent, you pay too much every month. For a remaining debt of 15,000 euros, that makes a significant difference. Refinancing an expensive old loan into a new agreement is therefore usually a smart financial move. A careful calculation of the early repayment charge is the first step in determining the actual savings.
The precise analysis of your current terms is crucial in order to realise the full savings potential.
The refinancing process: In four steps to a cheaper loan
Refinancing a loan follows a clear and straightforward process. With the right preparation, you can make the switch smoothly. Here are the four key steps:
Determine the outstanding balance: Ask your current bank for the exact remaining amount on your chosen repayment date. Also clarify the level of any early repayment charge.
Compare offers: Obtain several offers for a new loan in the amount needed to repay the existing one. Pay attention to the annual percentage rate, so you can compare the overall costs.
Conclude the new loan agreement: Once you have selected the best offer, sign the new loan agreement. Many banks offer a switching service and handle communication with the old bank.
Repay the old loan: As soon as the new loan amount has been paid out, the old loan is fully redeemed. Most banks recognise this redemption as notice of termination; only a few require a separate letter.
A common mistake is to cancel the old loan before the new agreement has been approved. Always wait for confirmation from the new bank to avoid a financing gap. This structured process ensures that you benefit from better terms, such as those made possible by repaying an expensive overdraft facility.
Costs and savings: An example calculation
The financial appeal of refinancing becomes clear through a simple calculation. Let's assume you have an existing loan with an outstanding balance of EUR 10,000 and a remaining term of 36 months at an interest rate of six per cent. Your monthly instalment is around EUR 304. A new offer promises an interest rate of just three per cent. The bank charges an early repayment fee of one per cent of the outstanding balance, i.e. EUR 100. The new loan amount is therefore EUR 10,100. With the new interest rate, your monthly instalment falls to around EUR 290. Over the full term, you save more than EUR 500 in interest costs despite the fee. Consolidating several loans can even multiply this saving potential.
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 fee, i.e. the charge for early repayment, is capped by law. If the remaining term is more than twelve months, the bank may charge a maximum of one per cent of the remaining debt. For a shorter term, it is no more than 0.5 per cent. This gives you a clear basis for calculation. A special rule applies to loans that have already been running for more than ten years. Under Section 489 of the German Civil Code (BGB), you have a special right to terminate with a notice period of six months, completely without compensation. This right cannot be excluded by contract and offers a great opportunity to optimise interest costs. A refinancing of home loans, however, is often subject to other, more complex rules.
Knowledge of these legal requirements is crucial for successful and cost-efficient refinancing.
Requirements for a successful debt restructuring
Banks check similar criteria for a debt consolidation application as they do for a new loan. Good creditworthiness is the key to success. Here are the most important requirements:
Stable income: A regular, open-ended employment contract is advantageous; the probationary period should be completed.
Positive Schufa report: A high Schufa score signals to the bank that you are a reliable payer and increases the chances of approval.
Majority and residence: You must be at least 18 years old and have a permanent residence in Germany.
Existing liabilities: The outstanding balance of the loan to be repaid should generally be over EUR 1,000.
Self-employed people often have to provide more detailed proof that their income is sufficient to cover the instalments. Good preparation and complete documentation speed up the process considerably and improve your negotiating position for paying off a loan with another bank.
Impact on creditworthiness: How SCHUFA responds
A refinancing can have a positive effect on your Schufa score. If you combine several small loans into a single 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, the loan enquiry may have a minimal impact on the score, but this effect is usually temporary. In the long term, a successful refinancing that is serviced on time leads to an improvement in your creditworthiness. This gives you a better starting position for future financing projects. A clear financial overview through refinancing is therefore also a strategic advantage.
Request an individual risk analysis now: Have your insurance situation checked free of charge and receive specific optimisation suggestions.
More useful links
Bundesbank offers statistics on interest rates and yields for consumer loans to private households.
Bundesbank provides MFI interest rate statistics on outstanding amounts and new business.
Bundesbank provides information on current deposit and lending rates.
Federal Statistical Office (Destatis) offers datasets on loans and online transactions.
Federal Statistical Office (Destatis) provides information on the consumer price index.
Consumer Advice Centre offers comprehensive information and saving tips on loans and credit.
Consumer Advice Centre of North Rhine-Westphalia provides detailed information on loans and credit.
FAQ
What is debt restructuring?
With debt restructuring, you replace one or more existing loans with a new loan. The aim is to benefit from better terms such as lower interest rates, a lower monthly instalment, or a term that has been adjusted.
What costs are incurred when refinancing?
The main cost item is the early repayment charge, which your old bank charges for the lost interest income. For personal loans, this fee is limited by law to a maximum of one per cent of the outstanding balance.
What documents do I need for refinancing?
As a rule, you need the same documents as for a new loan: payslips for the last three months, complete bank statements, a copy of your identity card and the loan agreements for the loans to be repaid.
How long does a debt restructuring take?
The process from submitting the 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. When you pay off the loan, you can cancel the associated residual debt insurance. Although you will not get back any premiums already paid, you will save on future insurance premiums.
Is it worth refinancing an overdraft?
Yes, refinancing an overdraft facility is almost always worthwhile. The interest on an overdraft is extremely high, averaging over nine per cent. An instalment loan is significantly cheaper and there is no early repayment charge.
