How to lower the loan interest rate (after approval)

By what criteria does the bank set the loan interest rate

Banks do not use a fixed interest rate. This means that two borrowers may be offered different terms for the exact same product. When deciding on the annual rate, the lending institution relies on the following parameters:

• Credit history.
• Employment status of the potential borrower.
• Package of submitted documents.

The scoring score generated by a special program is also taken into account. The more the client meets the bank's requirements, the lower the interest rate on their loan will be. Conversely: if cooperation with the client poses risks for the lender, a higher interest rate is assigned.

Does the bank have the right to change the loan interest rate

In accordance with Art. 29 of Federal Law “On Banks and Banking Activities,” credit institutions are prohibited from unilaterally changing interest rates on loans or deposits unless otherwise provided by law or contract. In practice, banks do not include such clauses in agreements with clients, as such an approach could negatively affect demand for the product.

As for the unofficial (informal) use of this mechanism, such cases are quite common. The bank may make such a decision and offer the client a reduced rate as an incentive, or the borrower submits an application to change the annual interest. This tool is called loan debt restructuring.

What is "restructuring"

Literally, the term means a change in structure. In the banking segment, it is used when the initial terms of a loan agreement are changed. The initiator of restructuring may be the lender or the borrower. The second case, when the application comes from the client, is more common.

A loan agreement is concluded on certain terms. After some time, the initial terms of the agreement may become unprofitable or unaffordable for the client. Often this is due to a deterioration in their financial situation, making loan obligations harder to fulfill.

In such a situation, restructuring is carried out: the bank changes the loan terms to ones more suitable for the borrower so that they can repay the debt without delinquency and other violations. Restructuring should not be confused with refinancing. These are two related but different products by mechanism.

What loan terms can be changed through restructuring

There is no single template for restructuring. Everything depends on the specific case, the credit institution's policy, the borrower's financial situation, and other factors. At the bank's decision, one or more loan terms are changed. These include:

• Interest rate.
• Amount or date of the monthly payment.

The lender also provides the borrower with a special service — credit holidays. This term means freezing the interest accrual process and postponing the next payment date for a certain period. This service is used to reduce the credit burden: so that the borrower can improve their financial situation. Often it is the interest rate that changes, implying a simultaneous reduction in the monthly payment and the debt amount.

How to use restructuring

Unlike refinancing, restructuring is not a standard banking product. It is not possible to review the terms in advance. If the credit burden has become unaffordable, and the bank does not offer options to overcome the situation, the borrower should independently contact the lender. This is done by submitting an application specifying the following information:

• Reasons why the bank may reduce the interest rate or change other terms of the loan agreement.
• Description of the situation in which the borrower is.
• Data on the loan agreement.

Such applications are drawn up in free form. The more data the borrower indicates in the document, the higher the chances of receiving a positive decision from the bank. At the same time, the lender has the right to refuse the application: no legal norm obliges the bank to change the terms of the loan agreement at the borrower's request.

Why the bank refused loan restructuring

It is important to know that restructuring is carried out by decision of the credit institution. Consequently, there is always a possibility of refusal by the bank. Objective reasons for a negative decision include:

• Numerous violations by the borrower of the loan agreement terms.
• The bank's doubts that restructuring will help the borrower solve the loan repayment problem.
• The lender is not interested in changing the terms of the agreement.

Also a common reason for refusal is the bank's policy under which restructuring is not used in principle. In such cases, the borrower should use refinancing, which is recognized as a more transparent and understandable service.

Why refinancing is more profitable than restructuring

First of all, it should be clarified that profitable loans do not exist in nature, since the borrower returns more funds than they receive when taking one out. Refinancing means changing the terms of a loan agreement by repaying the debt with a loan issued by another bank.

For the borrower, refinancing is more convenient because they know its terms in advance: it is enough to visit the bank's website to find out on what terms it refinances loans. Refinancing is also easier to use. To submit an application, the following steps must be taken:

• Find a suitable offer that matches the conditions.
• Submit an application.
• Find out the decision.
• Provide documents and conclude an agreement.
• Wait for the new lender to transfer funds to the first bank.

After repaying the loan obligations, the borrower becomes a client of the new lender. The essence of refinancing is that the second agreement is more favorable than the first. The benefit is expressed in a reduced interest rate and other loan terms.