Modulation of credit: increase or reduce monthly payments

credit loan

Very useful for decreasing or raising the amount of a credit term, loan modulation is a clause which can be activated in a mortgage and those in the consumer credit category. for an assessment

A flexible loan is a financing which incorporates a modulation option in the clauses of the contract. Concretely, this means that the borrower can ask to increase or decrease the amount of his monthly payments during the repayment phase of a loan. This action can quite be present in a mortgage as in a consumer credit.


Principle and operation of credit modulation

credit modulation

A borrower must approach their lending institution to request a modulation of their maturities. To be certain that this option is present in the contract, it is good practice to check it, or include it, before signing the final loan offer.

Most banks insert this clause automatically, especially since they have software capable enough to recalculate the amount of the monthly payments of a loan. On the other hand, some banks may not have suitable tools for modulating less common loan maturities, such as variable rate mortgage. On the contrary, the result is much easier to obtain with a fixed rate loan.

When is it good to make a modulation? It is advisable to make this request after the arrival of an event affecting household finances. This can be positive with an increase in the budget, after a salary increase for example, or negative with a decrease in income or loss of employment among others. According to this new situation, it may be advisable to adjust up or down its monthly payments so that they correspond to the current budgetary situation.


Is adjusting your monthly loan payments up or down free?

loan payments up or down free?

Triggering the modulation clause is not chargeable and can even be carried out several times a year according to the provisions of the contract. However, its action will create an increase or decrease in the overall cost of financing. The costs will therefore come from the possible interest surplus.

In this case, increasing its maturities after an increase in remuneration makes it possible to reduce the duration of repayment of the credit. This leads to a decrease in the interest payable to the lending bank, which is higher as the duration of the contract increases, and therefore in the overall cost of the operation. Good to know: if the banks generally refuse to finance the projects of the households which exceeds a debt ratio of 33% after the addition of the credit, they can accept that the borrowers exceed this threshold after an upward modulation.

Conversely, the lower monthly payments are favored in the event of a loss of income which mechanically leads to an increase in the debt ratio. Indeed, the share of monthly payments will increase in the new reduced budget. Adjusting the maturities down will weaken the weight of the credit, on the other hand this operation will increase the repayment duration of the loan as well as its overall cost.


Falling monthly payments are often capped by banks

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Please note, if establishments are open to significant upward variability in monthly payments, the leverage to reduce them is more limited. It all depends on the commercial policy of each bank, but often the drop in monthly payments and the increase in the duration of the loan are capped. For example, it will probably be difficult to add more than 2 to 5 additional years to the initial term or to decrease the amount of maturities by more than 30%.

If the downward modulation is not sufficient for the household to serenely repay its loan, the alternative is to have this loan together with the other debts being repaid in a single credit with the possibility of obtaining a financial envelope for a new project. This is the principle of grouping credits, an operation that allows borrowers to reduce, conditionally, up to 60% the amount of their monthly payments. Like the downward modulation, this choice to create a new reduced monthly payment adapted to the finances of a household very often increases the overall cost of the operation.