Financing is a very common way of acquiring assets immediately. Do you know that the letter of credit can be used for financing discharge? Let’s start at the beginning. Financing works by borrowing from financial institutions, but with significant interest payments, which can reach 17.5% per year.
High rates make it difficult in the long run to pay off financing
On the other hand, the consortium is an option for scheduled acquisition. People interested in buying the same good form a group and this sum of efforts enables it to be purchased without the need to pay interest.
But what few people know is that a letter of credit from a consortium can be used to pay off the financing of a car, property or equipment.
Interested? Want to get rid of high interest rates on your financing using a letter of credit? So, read the post and learn how to do it.
What is the letter of credit?
A letter of credit is the amount of money required to acquire certain good.
When you join a consortium, you determine this amount. The administrator then opens a group with those interested in the same good, which can be a property, a car, etc. Thereafter, participants start paying installments – without interest – during the contract period.
The consortium administrator now manages this money and the sweepstakes. Monthly, someone is drawn and receives the letter of credit in the amount requested. After acquiring the good, the consortium member continues to pay the installments until the end of the stipulated period.
For those who prefer not to have luck, there is the possibility of bidding. In this case, who anticipates the largest number of payment installments takes the letter of credit.
For example, a participant who, according to the contract, will pay 100 installments of $ 2 thousand may advance $ 100 thousand and thus pay 50 installments. This is a bid!
In any of these possibilities – draw or bid – the amount goes to a linked account, that is, the participant can only withdraw this money for the acquisition of the stipulated good.
The letter of credit has some advantages. Check it out:
- Security: It can only be used by the requester. Thus, it is possible to have full control over the amount received;
- Guarantee of purchasing power: This is because, unlike a traditional transfer operation, there is no need to pay taxes or fees that would be due if this financial resource went directly into your account;
- Cash payment: Because the letter of credit is used in much the same way as a cash payment, it guarantees your bargaining power, as the seller knows that he will receive the value of the product in the short term.
Why use the letter of credit for financing discharge?
The financing discharge guarantees the discount on future interest, which is, on the interest you would pay but which, on discharge, will no longer pay.
A person who has made a $ 300,000 loan at the bank, for example, pays for an asset that will take 360 months to pay off.
Therefore, in the end, the interest rates are extremely high. But when he can pay off in advance, he eliminates future interest on the loan. Therefore, discharge is always advantageous.
For this there are two possibilities: the cash payment or the letter of credit.
For those who have made a loan, it is always difficult to pay it in cash. This usually happens under very specific conditions, such as when you lose your job and upon termination, pay off the debt.
Therefore, and given the difficulty that most people have to save, the letter of credit appears as an excellent option for those who want to get rid of the interest on financing.
When the participant is drawn or bid, he can use this released resource to pay off his debt.
Imagine someone who owes $ 400,000. But to pay the financing, need $ 250,000. With a letter of credit in this amount, she will be able to settle this financing and get rid of the $ 150,000 that would pay interest and other fees.
When the value of the letter of credit is higher than the required amount, the remainder can be used to cover property documentation expenses, for example: transaction taxes, real estate registration fees, etc.
Another way to look at this question is to think about the deadline. If the loan was 30 years and one person, after paying for 10 years, can eliminate it, will be 20 years less interest! That is a considerable value.
How to use the letter of credit for financing discharge?
The discharge of letter of credit financing is regulated by the consortium law (Law No. 11.1795 / 2008). The requirements for this operation to be possible are:
- the financing and letter of credit must be in the same person’s name;
- the consortium group and the financing agreement may not be earlier than 2009;
- A real estate loan, for example, can only be paid off with a properly covered mortgage letter, ie both contracts must be in the same segment;
- The letter of credit must have an amount equal to or greater than the balance due to the financial institution for the purpose of settling the financing.
When all these conditions are met, the consortium administrator conducts a credit analysis, which evaluates the asset to see if the value matches what is being declared and paid in the transaction.
It is noteworthy that any bank has to accept the letter of credit for financing discharge. Therefore, this operation does not depend on the consent of the financial institution.
Anyway, using the letter of credit for funding is a great option for those who want to get rid of high interest rates. To learn more about the advantages of consortia, subscribe to our newsletter!