The term debt rescheduling includes those measures that are used to restructure existing borrower relationships and at the same time have the purpose of relieving debtors of them. The aim of debt restructuring is to put the borrower in a better financial position and improve his solvency.
The aim is to reduce the credit-related payment burdens in order to facilitate the borrower’s repayment of the loan and the repayment of the loan interest. By realizing potential savings, the borrower has more liquid funds available. As a result, debt restructuring will increase the debtor’s liquidity and improve its creditworthiness. Measures of debt restructuring are in question for indebted individuals and companies as well as for highly indebted countries.
The rescheduling is usually carried out by the inclusion of a debt rescheduling loan to replace an old loan or several existing loans and realize potential savings through better credit conditions. In this way existing loans can be reduced and merged. By bundling loans with different maturities and installment amounts, the borrower’s entire debt and financial situation is completely reorganized.
The merger into a single loan also has the advantage that increases the overview, because in the future only a installment payment is to be made. If a loan has been concluded for the purpose of replacing an existing loan, it is a so-called debt rescheduling loan. The debt-free liquidity should ideally be used to further reduce the level of existing debt. Thus, the realized capital can be used to balance overdrawn accounts or make special repayments on expensive loans.
Decision aspects for a rescheduling
Debt rescheduling can prove useful in the case of an out-of-date loan if it has been claimed over a longer period by repeated exhaustion of the credit line on the current account. Since the use of a disposition credit (dispatch credits) very high interest on discretionary charges and the demerger of the overdraft framework additional overdraft interest, the replacement of this loan by the cheaper installment loan is in any case advisable.
Since rescheduling only makes sense if the financial position of the debtor can be demonstrably improved, existing credit relationships and potential savings must be thoroughly examined by taking out a new loan. In particular, the existing loan agreements should be compared with the current terms of new lending arrangements.
A rescheduling can be economically useful if the interest rate has been demonstrably reduced since the conclusion of the contract for the old loans. This applies in particular to long-term loans, which were concluded at a fixed interest rate and thus do not give any opportunity to variably adjust the interest rate to the respective market level. In this case, savings can be achieved through lower interest rates. A particularly large saving potential results in times of a low market interest level.
In the course of the rescheduling the notice periods of the existing credits are to be considered. From a cost-technical point of view, it should also be borne in mind that credit institutions usually charge the borrower a prepayment penalty in the event of early termination of the loan, which may be very high, especially for long-term loans such as real estate financing. Therefore, not only the interest should be included in the rescheduling decision, but also all other costs and fees that may be incurred in connection with the credit transfer.