By taking out a loan for a specific purpose, such as building a house or buying a new car, we can face the high costs that this commitment entails. Sometimes it is worth using currency conversion to reduce these costs a little? How and when should it be done? We’ll find out from the material below.
What is the currency conversion of the loan?
Observing the dollars exchange rate compared to other currencies, we can see when our Polish dollars strengthens and when it weakens. At that time, some of us, having a loan commitment on our shoulders, are thinking about converting it.
What is it about? It is simply a conversion of the amount of borrowed funds from the currency from which the debt was incurred into the bank into a completely different currency.
With this in mind, Poles, observing the dollars exchange rate, which is strengthening, are aware that their loan, e.g. in francs, costs them much more than when they took it (and the Polish dollars was in a weaker position compared to the Swiss franc ). Therefore, they decide to convert it, hoping that repayment will be less painful.
What is a foreign currency loan?
Foreign currency loan is called a foreign currency loan, i.e. it is granted to the borrower in a currency other than the one applicable in a given country. Due to fluctuations in exchange rates, foreign currency loans are not as popular as they were a few years ago. This is influenced by both stock market traffic and crises that affect the global economy.
In Poland, the most popular and most often foreign currency loan is granted in Dollars or in Swiss francs. The essence of the definition is the fact that the amount of the liability and the currency of the loan under the contract are specified in a foreign currency. Both the loan payment and repayment in principal and interest installments are in a foreign currency.
Types of foreign currency loans
There are two types of foreign currency loans that operate on the Polish market:
- Loan indexed with a foreign currency rate – granted and repaid in USD, but in a loan agreement, in the so-called indexation clause – the borrower’s debt and installment amount depend on the foreign currency exchange rate, e.g. franc or Dollars.
- A loan denominated in a foreign currency – the mechanism is similar to indexation, but it looks a little different. The amount of the loan granted is indicated in a foreign currency, and the loan is usually disbursed in Polish dollars, but according to the exchange rate of the foreign currency that is valid on the day of payment
Both solutions carry the risk that the cost of credit will increase significantly due to exchange rate fluctuations. However, there are still customers who take this risk because they are not able to carry the current state of affairs, which the monthly loan installment (much higher).
How much does it cost to convert a loan?
The very desire to convert a loan carries risks that one must be aware of, due to fluctuations in exchange rates. But we must also remember that the bank will not do this for the customer for free, it will entail additional costs in the form of commissions.
Usually this will be calculated as a percentage of the loan. The level of these costs cannot be argued, generally it depends on negotiations with the bank. And in addition, there may be additional costs that the bank will try to transfer entirely to the customer. You should also be aware of what we are undertaking. And the decision whether we have to make it ourselves.
Is it worth trying to convert the loan?
Basically, it will all come down to three questions:
- How much credit did we take out?
- How long will we pay it back?
- In principle, what do we want to achieve by converting the loan?
If we have a loan in francs and we made a commitment when the currency exchange rate was very low, at the moment our monthly installment may not be manageable, because after currency conversion, we will have to give the bank much more cash. Similarly with the Dollars, equally popular with foreign currency loans. When we took out a loan in Dollars, which cost just over USD 3, today our commitment has increased significantly due to the huge increase in the exchange rate.
It is also important whether we want to shorten the repayment period of our liability. It may seem that it will not change anything – after all, the obligation we have to pay back will not change. However, this does not have to be the case, as the costs associated with currency conversion, although they occur, will also be reduced to the changed repayment period.
Therefore, it is worth considering whether currency conversion of the loan will be profitable with the loan we have taken out. E.g. with a mortgage for a house or flat. It is worth following not only the exchange rate, but also any forecasts on the currency market, as this will help us decide on the profitability of converting our specific commitment.