How does a debt restructuring work?

One can save by lower interest rates and reduce the rate of charge, for example, is regularly assured. Unfortunately, many of the information texts are not concrete enough. The inclined reader does not learn what rescheduling is exactly, how it is carried out and what are the advantages and disadvantages associated with it. This article fills in the blanks.

What is a debt restructuring and what is it for?


As part of a debt restructuring, an existing debt is replaced by a new one. Typically, this means that an old loan is paid off by a fresh loan. The hope is that the interest on the new loan is cheaper. The lower costs save the borrower. In the search for the new loan loans should therefore necessarily be compared. Only then can you really find the loan with the cheapest interest rates and the savings will be as extensive as possible.

Debt rescheduling is also often sought to change the duration of the loan and thus adjust the rate to your own needs. As a rule, the rate should be lowered. This means that the term will be extended. This can be necessary, for example, by changing jobs. If the new activity is paid less than the old one, the monthly burden may be too high.

The opposite direction is of course also possible, but rarely used: If the borrower finds a better paid job, he can pay more and would like to repay the loan faster through higher rates. This variant is rarely used because almost all loans contain the right to free special repayments at a level to be determined by the lender. A rescheduling is therefore unnecessary and then makes sense only if at the same time interest rates are lower.

How does a debt restructuring work?


First, it is necessary to ask the exact remaining debt. There are two things to consider: First, it is guaranteed by law that any debt can be repaid at any time. For example, the previous borrower may not refuse to provide information about how high the residual debt is.

Secondly, however, the previous lender has the right to claim a prepayment penalty. In fact, it is a penalty that the investor loses interest income because the loan is repaid early. The maximum amount of the early repayment penalty is regulated by law for all installment loans that have been in effect since July 1, 2010. Excluded are only real estate financing. Here, the lenders continue to set the early repayment penalty themselves. For other installment loans, which were concluded before the cut-off date, they also have this right.

Legal regulation: If the loan lasts for more than one year, the compensation amounts to a maximum of one percent of the balance. If the remaining term is less than twelve months, the maximum amount is capped at 0.5 per cent of the outstanding amount. Of course, it is up to each lender to take a lower prepayment penalty or to waive this altogether. If the rescheduling takes place in the house, for example, many lenders renounce this from goodwill. They are glad that the customer stays. A rescheduling with the previous lender can therefore be cheaper, even if the pure interest rate is slightly higher than another lender.

Ask for the current debt

In order to determine the remaining debt including the compensation payable, it makes sense to inquire about the “residual balance”. This term includes all costs payable when the loan is now repaid. In addition, the debtor should request the credit account and purpose. Both information is needed for debt restructuring.

The previous lender will send a written “offer” with the requested information. As a rule, this “offer” is limited to the maturity of the next installment. It therefore makes sense to initiate a rescheduling directly after a installment payment. So the time span is the largest one has for the replacement of the old loan by a new loan.

Apply for the new loan

Most lenders offer the option of rescheduling on the loan application form. Here, the information requested by the old lender must be noted. However, most donors do not offer a dedicated loan for debt rescheduling. The use-free personal loan must be used. The name is a bit misleading: the “private” does not mean that the money comes from a private person. It indicates that the borrower’s private decision is what he does with the money.

Assigned loans are only eligible for rescheduling if the loan exchange takes place within a purpose limitation. This may sound more complicated than it is: if the case is that a person has a car loan and wants to repost, they can use a different car loan. But if several loans are rescheduled at once, only the personal loan in question. This also applies if not only a rescheduling, but also a loan repayment is carried out. This means that the person receives a higher amount than the balance to gain financial leeway for another need.

What are the disadvantages of debt restructuring?


A debt restructuring can have four major disadvantages. First, the biggest problem is the cost. Those who are not careful run the risk of paying more in the future. This also applies if the annual percentage rate of the new loan is lower. A longer maturity can lead to higher interest costs. If the new loan runs longer, interest must also be paid longer. The absolute sum can therefore be below the line larger than a regular repayment of the previous loan. It is therefore to be expected exactly whether the rescheduling is really cheaper. Higher costs should only be borne by borrowers, who must reduce their monthly installment because otherwise they can no longer meet other payment obligations.

Secondly, a prepayment penalty is payable, which increases costs. This ensures higher costs. It should therefore always be checked whether the previous bank would renounce the debt penalty in a rescheduling in the house and the new loan would be cheaper than the loan from an external lender.

Third, there is a certain amount of bureaucracy involved with debt restructuring. The remaining balance needs to be inquired and a new loan has to be applied for. Fourth, this must be done within a relatively tight timeframe, as the debt restructuring offer is temporary. If this deadline expires, a new offer may be requested. But the entire bureaucratic effort starts from scratch.

In summary: Is a rescheduling always worth it?

No, a debt restructuring is not always worthwhile. By exchanging loans, a specific goal must be achieved. There must be a significant savings, the monthly rate should relax and / or multiple loans are being paid off at the same time. Ideally, the goals go hand in hand. You save and pay a lower rate. If none of the goals is achieved, rescheduling does not make sense.

If only one of the goals is achieved, it has to be weighed up. If you pay a lower rate but you have to put up with higher costs, you have to decide individually whether it makes sense. The same applies if there is a saving, but this is low. Especially with short-term loans (less than a year) then it has to be weighed whether it is worth the bureaucracy and a possibly higher rate.

Almost always worth the debt restructuring, if several loans exist. The burden of multiple installments is so much higher than one, so pooling the debt into a single loan is the right decision.