Financing with a loan has been part of everyday life for many people for years and decades. Both on a large and on a small scale, there is the possibility of taking out a loan for debt restructuring. The main goal of the refinancing is to reorganize the existing liabilities and to take advantage of them.
Importance of refinancing
With the taking out of a new loan for the purpose of refinancing, an existing or even several old loans are replaced. The purpose of refinancing is to take advantage of currently low interest rates and to improve the clarity of liabilities and repayments. In many cases, a new loan for debt restructuring has much better terms than existing ones. These include, for example, a favorable interest rate, low repayment rates and other terms.
With many different loans in particular, it can make sense to reschedule them to a single one. However, it is important to consider when debt restructuring is really effective. The effective interest rate at the time of the planned debt restructuring should be significantly lower than that of the old loans. It can be worth it for long-term overdrafts. For many people, they no longer belong to a period of bridging economic bottlenecks, but to everyday life.
Interest, which is often paid quarterly, is usually in the double-digit range and is often paid on a regular basis. If loans are in the phase of maturity, it is rather unfavorable to refinance them. Even if the interest rate level is seductively low, taking into account the total effort, including the costs involved, it can have a negative impact.
Advantages and disadvantages of debt restructuring
The replacement of existing old loans turns out to be a particular relief if they were concluded at a time of high interest rates. Possibly even without an interest rate adjustment clause in the loan agreement. The total interest burden of all old loans added together can be much easier in future with a loan for debt restructuring. Another advantage is cost control and the control of repayment obligations. Loans can be taken out on all occasions.
Whether it’s for quick shopping in a department store, withdrawing money from the bank, making planned purchases and vacation trips, or simply constantly charging your credit card. In addition to other loans, such as for training or home ownership, there are several regular repayments that can be difficult to manage and whose overview can be lost.
With a debt rescheduling loan, you may only have one payment date instead of several different ones. The contractual terms for a loan are easier to use than those for several different types. With advantageous credit terms for a new loan to replace other old loans, economic freedoms level off again.
Installment payments and interest charges are often lower. The option of saving may also make it possible to make special repayments that compensate for the loan more quickly. However, debt restructuring also has few disadvantages.
These relate in particular to the costs incurred, such as the processing and agency costs of the new loan, processing costs for the old loan (s) as well as a possible prepayment penalty and the conclusion of a new residual debt insurance. When checking the effectiveness of a new loan for debt restructuring, these possible costs should be taken into account.
The debt rescheduling of existing loans does away with permanent payment pressure and can eliminate financial bottlenecks. A new debt rescheduling loan is concluded and the existing one replaced. In principle, any loan can be rescheduled. Taking out a loan for debt rescheduling is usually an advantage if the terms and costs effectively match.