Refinancing offers with lower monthly instalments come with higher overall costs

Refinancing clients with ongoing loans is this year's "pie" that all banks with growth ambitions on the retail segment want a piece of, with adverts suggesting that savings of as much as 70% can be made on the monthly instalment. But such savings can be made only when the repayment period increases significantly, which, however, means that at the end of the contract, clients end up paying higher interests to the bank than in the case of the original instalments.

For instance, Raiffeisen, the third largest bank by assets, gives an example of a calculation whereby the monthly instalment of a 10,000-euro loan falls from 240 to 72 euros. The calculation is based on the interest rate difference - 7.15% in Raiffeisen's current offer compared with 20%, the hypothetical interest attached to the old loan, and in addition the repayment period is 25 years in the case of the new loan, compared with six years for the original loan.

"Clients choose to refinance a medium-term loan through a long-term loan either to reduce the value of monthly instalments, to get additional amounts, or a combination of the two - to significantly decrease the value of the instalment on the ongoing loan not because they have trouble repaying it but because they need another loan," says Mitică Tararache, director of individual loans at Raiffeisen Bank.