In Hungary, the foreign currency loan is probably the most popular credit product, due to the fact that a large number of families with foreign currency loans have been put into a hopeless situation as a result of the economic crisis of ten years ago.
Their installment has increased so much that they were unable to meet their repayment obligation, which further increased their debt, putting the people in vulnerable financial position in an unprecedented situation. Many of them lost their houses and apartments.
A foreign currency loan is a high-risk loan product, many of which could be perceived by their own damage. Today, due to the legislator’s intention, the market environment and the experience of the population, foreign currency lending has declined in Hungary. Nonetheless, it is worth looking at what a foreign currency loan is, why there is such a risk, and why it was a popular credit product.
The justification for foreign currency loans
FX loans were popular because of the much lower interest rates available than forint loans, since a decade and a half ago, when foreign currency lending spread, domestic interest rates were particularly high . The lower foreign currency interest rates meant that monthly installments of foreign currency loans were significantly lower than those of forint loans with the same loan amount. This was very attractive, and for many, it was the only way to get a property of their own, as they would have had no chance of having a much higher installment.
This could even be considered as a risk-taking but rational financial decision, but most of us probably did not think so, did not measure the risks of foreign currency loans.
Risks and costs of foreign currency loans
FX loans are actually loans that are settled in foreign currency, but disbursement and repayments are made in HUF. And the biggest risk is the exchange rate risk.
If the currency in which the credit is settled is strengthened against the forint (including the weakening of the forint), the value of the principal and the installment in HUF will increase immediately – that is, the debt and the repayment obligation will increase without the debtor doing anything. Theoretically, of course, the reverse may occur: the strengthening of the forint against the given currency, which has a debt-reducing effect favorable to the debtor.
In the case of foreign currency loans, the interest rate risk is the same as for any other loan. There is no guarantee that the interest rate will not increase in the country where the loan was taken out, as will the repayment installments of foreign currency loans.
Finally, there are costs that do not arise in the case of forint loans: such as the fee for a separate foreign currency account or the currency conversion fee. Experience has shown that even with these prizes, it was more favorable for the claimant to receive foreign currency loans, and the conditions of forint loans were so worse.
Is it worth thinking of foreign currency loans today?
As we have seen, the attractiveness of foreign currency loans was that the loan was available with lower repayments with lower interest rates. In today’s Hungarian market environment, interest rates are never seen in depth. Home mortgages can already be found at rates below 3%, and the interest rate is lower even in the case of less risky, longer interest periods. It would not be possible to find more favorable conditions for this in other currencies, and if we weigh the risks, not even. Thus, virtually no argument is made against foreign currency loans unless someone wants to raise foreign currency for speculative purposes.
Who can (do) borrow in free currency?
If someone was looking for foreign currency for the purpose of winning it through the exchange rate change because he expects the forint to appreciate significantly against that currency in the long run, and this will reduce his repayment obligation, a foreign currency loan can be a rational decision. But this is not to be considered a typical behavior, otherwise the exchange rate gain can be achieved much more effectively if one is looking for such an investment.
If someone needs money and wants to choose a credit product for this purpose, it is simply not worth the foreign currency loan under today’s conditions, maybe a foreign currency loan would be more expensive for the most favorable forint loans because of the various additional charges and would only be unnecessary risk taking. For this reason, it is recommended that anyone who accepts foreign currency loans should have sufficient security savings in order to overcome a situation that may arise from the negative effects of exchange rate risk at any time. If there is no such savings, you have to choose less risky credit.