Denominated credit – a loan in a currency other than the currency of the country
Denominated credit – is a currency loan, granted in a currency other than the currency of the country in which it was obtained. Its repayment also takes place in the currency in which it was granted, and not in the currency of the state of which the borrower is resident. Under a denominated loan, its amount is converted into foreign currency upon preparation of a loan agreement based on the exchange rate applicable on that day in a given bank.
Characteristic for denominated loans is the fact that the borrower knows exactly the amount of his foreign currency debt, but does not know its amount in the currency of the country in which the loan was obtained. As a result, the borrower does not know what amount will be transferred to his account by the bank.
Currently in Poland almost no way to get a loan in a different currency than a zloty.
The interest rate on a mortgage in a foreign currency is based on the interest rate in foreign currency and not on interest rates based on the national currency rate of the given borrower. Therefore, a loan in foreign currency should be considered only if the interest rate is much lower there than the borrower can obtain from the liability contracted in its national currency.
Credit denominated and risk
A denominated loan is associated with a higher risk of increasing the value of debt than in the case of loans taken in the currency of the country in which it is obtained. This means that as a result of unfavorable movements in the currency markets, the amount to be paid increases significantly in relation to the amount originally borrowed by the borrower.
When taking out a loan denominated, attention should be paid to the issue of cyclical changes in exchange rates. Changes in the value of the national currency in relation to the currency in which the loan was obtained lead to exchange differences in the total loan amount. Depending on changes in the exchange rate of the loan currency to the national currency, the loan amount may decrease or increase. In the first case, this leads to capital savings for the borrower, and in the second it leads to capital loss.
If the loan value is large, it is possible to reduce or reduce the risk associated with currency exposure by hedging it. The borrower may authorize the management of the loan on his behalf (through a limited power of attorney), in which the intermediary will exchange the borrower’s debt incurred in a foreign currency at the time of its change in relation to the base currency. Effective action then transfers the debt of the borrower to the currency whose value decreases in relation to the base currency. The loan can then be converted back to the base currency (or other depreciating currency) at a better exchange rate, thereby reducing the loan value. Another advantage of this action is the free choice of a currency with a lower interest rate than the base currency, which means that the borrower can thus obtain significant interest savings.
The opposite of the denominated loan is an indexed loan. It consists in the fact that the borrower knows exactly the amount of the loan expressed in dollar, which is converted into a foreign currency at the time of loan disbursement. If in the period between the conclusion of the loan agreement and its payment, the zloty appreciates in relation to the credit currency, then the debt in the foreign currency will increase.