Wednesday, 16 July 2014

Foreign currency loans

The currency risk is an integral part of the related debt in foreign currency. A rise in the exchange rate may even lead to a situation in which, after several years of repayment obligations, suddenly we owe the bank more than at the beginning of the loan.

The increase in the value of debt

The risk associated with debt in foreign currency to shows such as loans granted in francs in the second half of 2008. Swiss currency exchange rate then was about 2 , so thirty-credit in the amount of 280,000 was equivalent to a commitment of at 140,000 Swiss francs. Within five years the timely repayment obligations, the value of debt in francs, of course, fell, and because our sample borrower was able to repay the period until 40,000 francs, so the amount of its debt decreased to 100,000 francs.

However, since taking out a loan in 2008 changed the exchange rate, which rose to 2.0 about 3.40. Multiplying this value by the principal still outstanding so get 3,40 x 100,000 = 340,000 . The increase in the exchange rate made ​​so that, despite the timely repayment of the installments of obligations, our sample borrower is after five years should the bank per buck more than on lending.

unpleasant consequences

Such a large increase in the exchange rate will result in an increase in the debt so przeliczanego for the buck, which of course will be reflected also in the amount of the installment loan repaid in francs. For example, if the installment of the loan is 800 francs, it is based on a buck it was in 2008 about 1600 , and in 2013 increased to approximately 2,700 . In addition, the increased value of the foreign currency loan reflected in U.S. dollars can make the amount of the loan may exceed the value of the property, which is its security. If this happens, the bank may require additional collateral loan, or repayment of the debt, so that its value in U.S. dollars corresponded to the property credited. The simplest solution would be in this situation, the signing of an additional insurance policy, but of course that will not be free ...

Unfortunately, an increase in the exchange rate also makes it unprofitable able to sell the property securing the loan and the repayment of debt, because in such a situation, the funds obtained from the sale are not sufficient to repay the outstanding capital. Leveraged remain so horrendously high pay off the loan installment and hope for a reduction in the exchange rate.

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