09 June 2022
The OCF shows how changing the currency of the loan results in an increase in the monthly installment to be paid.
In Costa Rica, the exchange rate situation makes many debtors who have their loans in dollars and their income in colones think, to the point that they consider transferring their debts to local currency. However, the Office of the Financial Consumer (OCF) warns that the colonization of credits may not be such a good idea and, on the contrary, it may be counterproductive for your finances.
“Every time the exchange rate begins to rise rapidly, many people who have loans payable in dollars and receive their salary in colones, are tempted to convert their credit, thinking that they will experience a benefit and earn more money. to uncertainty. However, the Office has developed a simple exercise to show that this change often means a false expectation of savings and, on the contrary, the debtor ends up using more money to pay his monthly installment. In short, what seemed like a good move turns out to be a bad calculation,” said Danilo Montero, general director of the OCF.
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The example that the OCF proposes is the following:
We assume that the exchange rate is ₡690 (six hundred and ninety colones) and that a person has a loan for US$10,000 (ten thousand dollars), they have 10 years left (120 months) at a rate of 6% per year (0.5% monthly), and the current installment to be paid is US$111.02 (one hundred eleven dollars and zero two cents) which, at the current exchange rate indicated, the amount in colones to be paid is ₡76,604 (seventy and six thousand six hundred and four colones).
If the person changes from dollars to colones, he occupies a loan of ₡6,900,000 (six million nine hundred thousand colones) to be able to buy the US$10,000 he owes on the loan. If we assume that the debt in colones is also for a 10-year term with a fixed interest rate of 10%, the monthly loan installment will be ₡91,184. (ninety-one thousand one hundred and eighty-four colones). This means that, from the outset, the monthly installment of this credit is ₡14,580 (fourteen thousand five hundred and eighty colones) more than what was being paid with the debt in dollars.
This exercise can be modified to incorporate other assumptions. For example, if the credit in colones has a commission of 1%, the consumer will have an additional expense of ₡69,000. But if, in addition, the loan in colones has a variable rate, as the basic passive rate increases, the loan rate will also rise, so the installment in colones increases more.
For the currency conversion of the credit to be worthwhile, it would take care that the exchange rate increase much more to compensate for what it was paying less for the dollar fee. In fact, with the numbers of the simple example that was shown, the exchange rate would have to rise to ₡821 per US$1, so that the fee that was paid before of $111.02 means a payment in colones of ₡91,184. As long as the exchange rate does not reach that level, the person is paying more for the credit in colones. As can be deduced, if the exchange rate begins to return to levels of, for example, ₡670, the conversion is even less beneficial for the consumer, since the payment he made before of ₡76,604 for his credit in dollars decreases to ₡74,370.
An option that people can explore, but which is not so convenient either, is to obtain a loan in colones that allows them to maintain a new loan installment equal to what they paid when it was in dollars; In that case, the credit would have to be for 14 years instead of 10, which means that you will have to pay 4 more years of interest.
Always through this example, the OCF also draws attention to the fact that the 10% rate could be very optimistic in the current market context. It could be that the credits are rather 12%, so the installment of the new credit would be ₡98,994.95, which further increases the distance compared to what was paid when the credit was in dollars.
Of course there is the possibility that the credit rate in dollars is variable. But in any case, the exercise remains the same. There is an initial distance between the rate in colones versus the rate in US$ that goes against the consumer.
This exercise does not mean that it will not help anyone to switch to colones. For example, for someone who took a loan in dollars very recently, it may be that, given the sudden increase in the recent exchange rate, it makes sense. Or, someone who had an old loan with a somewhat high rate in dollars, similar to what the new one would have in colones.
“In conclusion, the conversion of debts in dollars to colones is not the miracle that is sometimes thought. The sin is at the origin, from the moment the consumer took the risk of a credit in a different currency than his income. People must do a very careful review of their particular case to determine if it is right for them. In any case, the higher the new colones rate is against the old dollar rate, the more the exchange rate will have to rise to make it worthwhile. The general rule continues to be that, if the person plans to take out a new loan, it is advisable to do so in the currency in which he receives his income, to avoid the effects of exchange rate risk, “concluded Montero.
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