The more you reduce your monthly payments and your debt ratio, the more you will increase the duration of repayment.The question is therefore whether you prefer monthly payments reduced to a minimum or a shorter repayment period?
Illustration of a loan buy-back
A couple with children earns $ 3,500 per month and their monthly consumer credit amounts to $ 1,885. Housed by the employer of one, they start their month with $ 1,615, or a debt ratio of 54%. Taken together, the total costs of their credits are $ 3,374.
Case 1: I reduce my monthly payments
An establishment offers them to buy back their credits at 6.60% over 6 years with additional cash of $ 2,000. With this buy-back, their monthly payments now amount to $ 631.67 and they can start their months at $ 2,868.33, or with an additional $ 1,253.33. As for their debt ratio, it drops to 18% and the total cost of this new loan is $ 8,013.24.
Thanks to this offer, the couple collects $ 1,253.33 per month and divides their old monthly payments by three times. This takeover is therefore interesting because it allows them to breathe early in the month and drastically reduce their debt ratio. However, their repayment duration is extended by 3 and a half years and the total cost of credit becomes more than twice as high.
Summary of the example. Total amount of loan repurchase: $ 37,467. Total amount owed by the borrower: $ 45,480.24. Duration of the loan: 6 years. Fixed debtor rate: 6.60%. Fixed APR: 8.95%. Optional credit insurance: $ 9.37 per month, i.e. $ 674.64 over 6 years. TAEA (Annual rate of optional insurance): 0.30%.
Case 2: I limit my borrowing period
An establishment offers them a buyout at 6.60% over 4 years with cash of $ 2,000. Here their monthly payments go to 890.33 $ and their debt ratio to 25%. They can therefore start their months with $ 2,609.67. As for their total cost of credit, it amounts to $ 5,268.84.
Here, the couple certainly reduces their monthly payments much less, but their living remains very suitable for 3. As for their repayment duration, it only lengthens by an additional year and a half and the total cost of credit increases less than in the first case.
Summary of the example. Total amount of loan repurchase: $ 37,467. Total amount owed by the borrower: $ 42,735.84. Duration of the loan: 4 years. Fixed debtor rate: 6.60%. Fixed APR: 8.95%. Optional credit insurance: $ 9.37 per month, i.e. $ 674.64 over 6 years. TAEA (Annual rate of optional insurance): 0.30%.
Comparison of the two loan buy-back solutions
To summarize, here are the two solutions available to the couple:
- Reduce monthly payments as much as possible or limit its duration?
- Total or partial buyout?
- How much will it cost to buy back credits?
- Redeemable credits
- Renewable credit redemption
- Renegotiate credit repurchase