FOREIGN CURRENCY LENDING FOREIGN CURRENCY LOAN MEANING DEFINITION RISKS OPPORTUNITIES OF FOREX LOANS FOREIGN MORTGAGE
WHAT IS A FOREIGN CURRENCY LOAN?
A foreign currency loan is by definition money that is granted in the currency of any foreign country to a borrower against the repayment of the loan principal amount through free convertible currencies plus interest.
A foreign currency loan or forex loan is a funding facility that is disbursed and repaid in a different currency than the currency of the revenues of the loan applicant with substantial positive or negative consequences for a borrower who earns money in a currency and repay a loan in another currency.
A foreign funding facility in contrast to local loans is facing two main challenges for the loan applicant and that can have a huge impact on his or her financial position: the permanently changing exchange rate and the interest rates of the foreign currency.
WHAT ARE THE OPPORTUNITIES AND THE RISKS RELATED TO A FOREIGN CURRENCY LOAN?
Foreign currency loans present two sides that can be profitable for a borrower or disastrous given that he or she needs to repay a loan in a currency on the basis of earning money in another money.
The developments of the exchange rate and the interest rates on both sides, the lenders and the borrowers will determine the outcome of such a loan agreement.
OPPORTUNITIES OF FOREIGN CURRENCIES LOANS
Foreign currency loans once they have been agreed are made and in case the exchange rate of the lender’s currency against the borrower’s currency goes down with the time, the loan applicant will have to repay less principal.
Same applies for the interest rates, as they different from currency to currency, in case the interest rate of lender’s currency decrease against the borrower country interest rates, the latter will have to pay less interests.
RISKS OF FOREIGN CURRENCY LOAN
The risks of foreign currency loans are huge if the exchange rates of the borrowed money currency and the interest rates take the wrong direction (foreign currency becomes stronger and interest rates go high), and given that the borrower revenues are in a different currency, he may risk to repay more than initially agreed.
The case of Hungary in 2008 is typical for the speculations of households who borrowed for mortgages in Swiss Francs what appeared at the beginning very attractive and was at the end pushing borrowing households to the financial edge.