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Loans, consolidation and foreclosures

Are you considering taking out a loan? Do you know how repayment works and what types of loans exist? Or do you already have a loan, even several, and keeping track of what and where you’re paying back is becoming increasingly difficult? Maybe you can’t even make the payments anymore, the bailiff is knocking on your door and you’re thinking about the desperate solution of taking out a loan to pay off the foreclosure. Whichever of these problems you’re dealing with, our article is here for you.

8 minutes of reading

Chapters of the article

How a loan and credit differ

From the point of view of the person applying for a loan or credit, they are practically one and the same thing and the term loan is commonly used in the Czech language to refer to both a loan and a credit. Similarly, in this article we will refer collectively to loans, although in some cases we will refer to loans.

However, from a legal point of view, a loan is defined in such a way that its object is only funds and is regulated by the Consumer Credit Act. A loan can only be granted to you by entities authorised to do business, usually banks, on the basis of a loan agreement. The validity of a credit agreement begins with its conclusion and is therefore a consensual contract. By signing a credit agreement, you undertake to repay the amount borrowed within a given period of time, together with interest.

Tip: Do you want to buy a house with a mortgage? Read our article on how to buy a house financed with a mortgage.

On the other hand, the subject of a loan can be anything and is regulated by the Civil Code. Anyone can grant you a loan on the basis of a loan agreement. This differs from a loan agreement in that it only comes into force after the actual delivery of the subject matter of the agreement – it is therefore a real contract. In the case of a loan agreement, you undertake to return the item within an agreed period of time.

How loan repayment works

First of all, it is important to know that the more you repay, the less you will pay in interest and also the shorter the time you will repay the loan. It follows that it pays to pay off the loan as soon as possible, but of course this is not always possible.

Tip: Do you lend money to anyone? Then our article will come in handy.

The loan can be repaid in several ways:

  1. Annuity repayment: this is the most common type of repayment. It is the most common type of repayment. The amount you repay is fixed in advance and does not change. The only exception is mortgages where the amount of the repayment does not change for the duration of the fixation period (which is usually 3-10 years), but may change afterwards.
  2. Lump sum: This is the usual method of repayment when, for example, you need a larger sum of money quickly before payday. You therefore take out a loan which you repay in one go when you receive your payday. The maximum repayment period is usually set at 30 days.
  3. Progressive repayment: This is a regular repayment where the repayment is increased over time (usually once a year) by an amount corresponding to the market situation. This type is suitable for those who expect their ability to repay to increase over time (e.g. by increasing their business income or increasing their salary).
  4. Degressive repayment: this is the opposite of progressive repayment – the amount of the repayment decreases over time.

Do you need help with anything?

We’re here for you. We can help you solve your loan and foreclosure problems. We will review contracts before you sign them and advise you on any legal problem.

The basic division of loans

The world of loans is really diverse and you can find a lot of different types on the market. We therefore give you a basic breakdown to help you navigate this confusing landscape.

By purpose

  • Loans with a purpose: As the name suggests, a loan with a purpose can only be obtained if you prove the purpose of the money you borrowed. However, this makes them offer better interest rates.
  • Non-purpose loans: These loans do not require proof of purpose. On the other hand, you will pay more in interest.

Depending on the length of the loan

  • Short-term loans: Short-term loans have a very short repayment period – usually 30 days.
  • Medium-term loans: these are a common type of loans for smaller expenses. The repayment period is usually in the order of months to years.
  • Long-term loans: The most common type of long-term loan is a mortgage loan. The repayment period can be set up to several decades (usually 5-30 years).

Depending on the collateral

  • Loans with real estate collateral: You will only get a loan if you guarantee the property or another movable asset of equivalent value.
  • Loans without real estate collateral: you can get a loan even without real estate collateral. However, only reliable clients can get it or non-banking companies can also provide it, but often under unfavourable conditions.

Depending on the lender

  • Bank loans: Only banks offer this type of loan. They have clear rules so you don’t have to worry about being cheated. On the other hand, a bank will not lend money to just anyone, so you may not meet their terms and not get the loan.
  • Non-bank loans: almost anyone can get a non-bank loan. On the other hand, the terms are often non-transparent and the interest rates are high.

What is consolidation?

If you have more than one loan, consolidation is worthwhile. This involves merging all your loans into one. This works by the bank paying all the loans for you and giving you a new ‘umbrella’ loan on better terms.

Advantages of consolidation

Consolidation offers several advantages:

  • Simplified finances: One of the main benefits of consolidation is simplifying your financial situation. Instead of managing multiple debts with different due dates, interest rates and terms, you consolidate them into a single loan. This will make it much easier to keep track of your finances and reduce the likelihood of missing payments.
  • Lower interest rates: consolidation will also often lower your overall interest rate.
  • Repayment strategy: consolidation provides a structured repayment plan for your loans. With a clear timeline and fixed monthly payments, you can work towards getting rid of debt for good.

Tip: Has a friend asked you to guarantee his loan? We’ll advise you on how not to get into trouble as a guarantor.

Types of consolidation

According to liability

  • Consolidation without real estate: in this case, you do not have to guarantee the loan with real estate or movable property of equivalent value. However, this is not a common practice and is more likely to be offered by non-banking companies with worse conditions. If banks already offer it, they have very strict conditions and it is not easy to get it.
  • Consolidation with real estate guarantee: This is the classic form offered by most banks. You guarantee the repayment of the loan with real estate or a movable asset of equivalent value.

According to the lender

  • Bank consolidation: This is provided by a bank. It has stricter conditions on the applicant, but it is transparent and offers better interest rates.
  • Non-bank consolidation: This is provided by non-banking companies. Almost anyone can get it, including troubled clients who have, for example, an entry in the debtors’ register. But it also has higher interest rates than a bank and often non-transparent terms.

What is foreclosure

If you default on your loans, you may end up in foreclosure. This is a court-enforced repayment of debts in a variety of ways, including regular deductions from wages or seizure of property.

Tip: Read our article on the topic of execution by deductions from wages and other income.

How not to protect property or payment of executions

Paying off foreclosures or foreclosure loans is often only a temporary method of protecting your property. It consists of you being given a loan to pay the foreclosure and then repaying the loan. In addition, you can often take out such a loan to pay off foreclosures without guaranteeing the property.

What’s the catch? Only non-banking companies offer this type of loan because banks will not lend money to a person who is in foreclosure. However, a loan from a non-banking company comes with higher interest rates and often hidden conditions and penalties for failure to repay.

Tip: Don’t tackle your debts with more loans and instead read our article on how to protect your property from foreclosure.

In conclusion, it should be stressed that proper handling of finances, prudence when taking out loans and active asset protection are key elements for financial stability and a healthy relationship with loans. It is also extremely important to be aware of all the options available and to consider your decision well before signing any contract.

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Author of the article

JUDr. Ondřej Preuss, Ph.D.

Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.

Education
  • Law, Ph.D, Pf UK in Prague
  • Law, L’université Nancy-II, Nancy
  • Law, Master’s degree (Mgr.), Pf UK in Prague
  • International Territorial Studies (Bc.), FSV UK in Prague

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