Foreign currency loan: advantages and disadvantages

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Loan rates weren’t always as low as they are now. Less than a few years ago, things looked different, so foreign currency loans were a real alternative to USD loans. They were cheap and especially popular with home builders. Even if interest in foreign currency loans has declined due to low interest rates on loans in the national currency, there are always enough people who take out foreign currency loans – be it that they find it financially attractive or it has been recommended to you by financial advisors. But it is always good to find out that besides many advantages there are disadvantages and risks with such loans.

What is a foreign currency loan anyway?

What is a foreign currency loan anyway?

A foreign currency loan is defined as such when a loan is taken out in foreign currency rather than in USD as usual. Loans in Swiss francs, Japanese yen or US dollars are particularly popular. The base currency always remains the USD. Currency fluctuations are also shown in USD.

An important difference to the loan in the national currency: foreign currency loans are only repaid at the end of the term; only the interest accruing is regularly paid to the creditor.

What are the advantages of foreign currency financing?

What are the advantages of foreign currency financing?

It would not offer so many banks foreign currency loans if there was no interest. So loans in francs, dollars and yen actually have several advantages. On the one hand, interest rates in foreign currencies are usually cheaper than in USD. For comparison, mortgage interest in USD is currently (depending on the duration and amount) around 4%. Loans in US dollars and Swiss francs are usually less than 3%, in Japanese yen – even less than 2%. So, at least in theory, you can save more than half of the interest.

On the other hand, many foreign currency borrowers hope for currency gains that arise when the USD exchange rate rises. In the best case scenario, you will even end up paying back a smaller loan amount than you received.

What are the disadvantages of a foreign currency loan?

What are the disadvantages of a foreign currency loan?

One thing is clear: a loan in a foreign currency is a speculative transaction. The likelihood of ending up on a winning side is just as great as the likelihood of losing. The main reason is that you cannot predict how the exchange rate will develop over the years.

There is also an interest rate risk: if interest rates rise, a foreign currency loan can be less advantageous. Then there are fees and ancillary costs, which can be higher for such loans than for loans in USD.

Last but not least: Foreign currency loans require more attention and time, which borrowers need to keep an eye on the credit. Adverse developments often require quick action, such as currency changes.

Conclusion: Loans in the foreign currency are cheaper as long as the USD remains strong and the base rate is low. However, regular monitoring by the borrower is required so that an adverse change can be reacted to immediately. Professional advice and a very good credit rating are a must for foreign currency loans.

   

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