Debt refinancing

Debt refinancing is a term used for the process of converting original debt into new debt. This is often done for the purpose of consolidating debts and allowing easier and more efficient payment. One of the main objectives of debt refinancing is the overall lowering of interest rates, which becomes possible once debts have been consolidated.

By having their debt refinanced, companies may also change their short-term loans into long-term loans. Although this extends the period of time during which an entity will have to service debt, for many companies, this can be a very helpful arrangement. Extending the payment term lowers the amount due per month. This lessens the amount that goes to debt servicing while improving the company’s cash flow. In such a situation, the company will be able to allocate its funds to asset acquisition and the maintenance of smooth operations.

Entities that wish to enter into a debt refinancing agreement should first consider the provisions and interest rates being offered by the new schemes. This is particularly true in cases where several debts are consolidated. By comparing the interest rates and other provisions being offered, an individual or company will be able to decide on whether debt refinancing will be beneficial, or if it won’t make much of a difference given the conditions set by the bank or financial agency.

Debt refinancing, specifically for secure loans, may usually be granted for 80 percent or less of the total collateral value. Payment terms may also vary depending on the total amount owed, as well as the debtor’s credit worthiness. Debtors with a high credit rating generally enjoy more lenient conditions and lower interest rates, whereas those with lower credit ratings may be given higher interest rates as well as stricter payment terms.