Loan refinancing is the most versatile method to reduce debt burden or consolidate multiple loans into one for easier repayment, plus take an additional amount. This tool is becoming increasingly popular in Kazakhstan each year. For example, according to the Association of Financiers of Kazakhstan, over 35,000 mortgage loans amounting to 233.5 billion tenge were refinanced in the country from 2015 to 2021. In Kazakhstan, 10 out of 21 second-level banks offer loan refinancing services.
However, not everyone is aware of the intricacies of such a banking product as refinancing and how to refinance their loan under the most favorable conditions. The editorial team of "Kursiv" spoke to Gulnara Musatayeva, Chairman of the Board of JSC "Nurbank", for details. She previously confirmed the growing popularity of loan refinancing in Kazakhstan.
— What is the essence of the loan refinancing service?
— Refinancing allows reducing the loan burden. Thanks to the product, a borrower can not only close existing loans with other banks but also receive an additional amount to meet some of their current financial needs. The advantage of Nurbank is that we refinance not only homogeneous loans. For example, a car loan can be refinanced as an unsecured loan, and the vehicle will be freed from collateral obligations. Overall, the refinancing service can be a good solution for a client who finds themselves in a tough life situation when the income has decreased, and servicing loans has become challenging. In such cases, refinancing on the principle of "lower rate, longer repayment term" will ease the financial burden.
— In what cases is loan refinancing beneficial for the borrower?
— Refinancing is beneficial for a client if the interest rate difference is 2-3% or more annually and the loan is calculated for several years. There is no point in refinancing if the difference is less than this level. One must thoroughly study the proposed conditions to avoid overpaying for hidden fees. We recommend clearly determining the size of the monthly payment when refinancing. For example, at Nurbank, the fee for organization is charged only on the additional amount, not the entire loan amount. This is also our competitive advantage.
Let me give you an example. If you take out an unsecured loan at another bank for 1 million tenge for 48 months, the monthly payment will be 45,340 tenge, and the overpayment amount will be 1,176,000 tenge. When refinancing this loan at Nurbank, the monthly payment will not exceed 37,180 tenge, with an overpayment of 784,500 tenge. The benefit is evident.
— How are interest rates calculated during refinancing: on the entire loan amount or the additional amount?
— Interest is charged on the entire refinancing amount because it is a new loan issued to the borrower to cover their current debt and any additional amount. That is, the loan amount includes the principal debt plus the additional amount.
— What else should a client pay attention to when refinancing a loan?
— It's important to know that when refinancing from another bank without taking an additional amount, the client receives more favorable conditions with us in terms of monthly payments, reducing their payment load. In internal refinancing, the client receives an additional amount for consumer purposes without the time needed to provide a full set of documents.
— Are there any pitfalls in refinancing?
— We always advise realistically assessing your financial capabilities and not overloading yourself with debt obligations because the loan will have to be repaid. Unfortunately, many borrowers view refinancing not as a tool to reduce debt burden but as an opportunity to take new loans. Another pitfall is the need to arrange insurance during refinancing and hidden bank fees for arranging a loan. We always recommend carefully calculating the costs that refinancing a loan will entail and how they will affect the overall benefit.
— How does the loan refinancing process work? How long does it take? And how complicated is it?
— A standard process applies when considering a refinancing application. First, we consult clients on credit terms, then the potential borrower needs to gather all necessary documents, undergo legal assessment and evaluation of the collateral. Next, we decide whether to approve the refinancing application.
The main difference between this service and regular lending is that the client must provide information about the debt and the primary loan conditions and receive a guarantee letter from the lending bank about paying off the client's debt and releasing the collateral. If the loan is unsecured, funds are transferred to the lending bank immediately after signing the loan agreement with the client and receiving the guarantee letter.
If the project involves collateral, a preliminary collateral agreement is signed simultaneously with the loan agreement, and a tranche is sent to the lending bank. After the collateral is released by the lending bank, the procedure of registering the encumbrance of the collateral by our bank is carried out, after which the client is issued a second tranche — the additional loan amount approved beyond the refinancing amount.
The process takes from three business days for unsecured refinancing and from seven business days if collateral is involved.
— In your estimation, will there be an increase in demand for such a service?
— According to the First Credit Bureau, the volume of unsecured consumer loans issued in 2022 amounted to 6.7 trillion tenge, 16.8% higher than in 2021. As of January 1, 2023, the portfolio of unsecured loans previously issued by banks, MFIs, and credit partnerships reached 7.4 trillion tenge.
Statistics show that every fifth car is sold on credit, with a large amount of household appliances and furniture purchased daily on installment plans. Therefore, we expect the refinancing service to remain in demand in the future. It can be confidently said that this is an important product for our market.