Debt refinancing happens when an individual or a business combines several debts into one single payment to lower overall costs, among other reasons. For example, if you have two loans with an interest repayment rate of 10 percent and two loans with an interest repayment rate of 8 percent, a debt refinancing plan at 7 percent saves money on all the loans. In addition, you'll only need to make one monthly payment, rather than multiple payments.
Personal
Personal debt refinance -- known as debt consolidation -- helps individuals get out from under the burden of overwhelming debt. The consumer pays the various debts off by taking out one large loan, which is paid back monthly -- usually at a lower interest rate than the previous loans. In some instances, a borrower refinances his home and uses the money in order to pay off the various debts.
Business
Business debt refinancing works the same way as personal debt refinancing, although the numbers involved are larger. For example, many business debt consolidation programs require a minimum debt of $100,000 in order to accept a business debt refinancing plan. If the amount of the debt is less than that, examine other alternate methods, such as taking out bank loans.
Chrysler
One of the most largest debt refinancing plans came from Chrysler Group LLC. When the economic downturn of 2008 struck, many of the major automakers turned to the United States Government for money to keep going. Chrysler was one of the automakers and in 2009, the United States provided financing to keep Chrysler going. When foreign automaker Fiat made its intentions clear about wanting to purchase Chrysler, the auto manufacturer first had to pay off the United States government before the deal could progress. In order to accomplish that, it set in motion plans to have four major banks set up a debt refinance program.
Risks
Debt refinancing contains risks. In many cases, lenders require additional collateral before initiating a debt refinancing program. The collateral is forfeited if the debt financing does not work. In addition, if a business undertakes a debt refinancing program, potential investors might not want to put money into the business. There are times when debt refinancing must be used, despite the risks. When Fannie Mae found itself in financial trouble during the mortgage crisis in 2008, the only way it stayed functioning was by refinancing its debt.
0 comments:
Post a Comment