In refinancing debts, the borrower requests a new commercial or personal loan through a debt instrument with better terms than the previous agreement which generally holds higher interest rates than the current operations. An example of a debt refinance would be to apply for a new, cheaper loan and use it to pay the liabilities of an existing but expensive loan.
Reasons to refinance debts
We can also call this transaction Debt Transfer or Portability. Debt Refinancing is used in the most liberal way possible, it is different from debt restructuring because it is a much faster and easier process to qualify. Usually the impact of the credit score does not prevent approval once the original loan will be paid off.
There are several reasons to refinance debts, the most common reasons being to reduce interest rates on the current loan, to consolidate debts or to change the terms and terms of the loan, in addition to the need for resources for the Cashier. Borrowers with a higher credit score especially benefit from refinancing debts in order to secure the more favorable terms of the contract and with lower interest rates.
Why replace one loan with another
Essentially it is very effective when you replace one loan with another, so debt refinancing is often used when there is a change in interest rates that can influence newly contracted loan contracts. For example, if interest rates are reduced by the Northern Bank of Brazil, as is happening now, new loans, as well as credit bonds, will offer lower yields on interest payments, which is advantageous for borrowers.
In this circumstance, a debt refinance may allow borrowers to pay much less interest over time for the same nominal loan.
In which situation is debt refinancing ideal?
It is important to note that when trying to repay the loans before maturity, many fixed term loans have what are called prepayment or early repayment. The terms generally impose some penalties in the case of early repayment of the loan.
However, if the contract has already met the deadline of the fine, in such situations, borrowers must make their request to know the calculation of the present value in order to be able to refinance or transfer the debt with one of the modalities that buy debts with another loan more cheap.
Refinancing for individuals, small and medium enterprises
It is important to note that both individuals and small and medium-sized companies have access to debt refinancing, and usually the fundamentals for hiring and executing are based on the same credit and valuation processes.
Recapping: Debt refinancing is used on a much broader basis, in which a borrower requests a new loan to get better terms to repay a loan in progress.
In another article we will talk about debt restructuring which is different, it is used when a borrower is under such financial pressure that even prevents him from making early repayment of the loan. To understand the similarities and differences between the two strategies for financial reorganization, it is vital to know how they work.