Structured Debt Explained

Structured debt is simply any type of dept such as a credit card or car loan, by which the lender customizes terms for the borrower. Typically, it is structured to include incentives for the borrower to do business with the lender. Borrowers, however, must be careful that this "special" structuring doesn't appear to be more favorable to the lender by including increased fees, penalties and payments.

Fine Print

Structured debt is also called "customized debt" and "tailored debt." Borrowers must be clear on terms and all the fine print of the contract. The final amount to be paid off should be calculated.

Terms

In many debt consolidation schemes, the company will offer to pay off all the borrower's loans and give him a lower monthly rate. The length of payments, though, will be extended to make a larger profit for the company.

Example

To give an example, a person may have $10,000 in credit card debt, is paying the minimum of $200 per month, with the total debt to be paid off in four years and two months (actually longer if interest is taken into account). The debt consolidation company will create a structured debt for the borrower to pay $156.45 for six years. While the terms may appear attractive, the borrower will actually be paying $11,264.40. While the debt is structured so the borrower is paying $43.55 less per month, he will actually be paying $1,264.40 extra.

Your Best Interests

After clearly understanding all terms in the structured debt contract and the total amount she will actually be paying, a borrower must determine if this is the best situation for herself. If she cannot afford $200 per month and is willing to pay the additional sum after six years, then she should accept the deal.

Interest Deferment

One common structured debt instrument is to defer interest until the end of the loan. This is commonly found in bond issues in which the debtor has a better chance to have the project funded with bond proceeds once revenue is beginning to be generated that can cover the principle and interest when it's finally due.