Debt refinancing is paying an existing debt with another debt under different and less strict terms. The benefits of refinancing are that you could be getting a better interest rate that may feature a reduced monthly payment or a prolonged payment term from the previous. For example, you could get a new mortgage to replace the already existing.
So what happens is that the first loan is paid off making room for the second one to be created. According to the Financial Times, over 8 million people in the UK have been tied down with problem debts, and as much as they may try to keep their ducks in a row, something will always fall out and cause a financial strain. A family member could get admitted with serious ailments that the insurance cannot cover fully.
What causes high debts?
You could be supporting your child in school who needs a constant supply of funds or running a business that hasn’t picked up yet; the above situations would slowly push you to accumulate credit card debts. Students also tend to accumulate debts that they can rarely pay back in full. December 5th, 2019, BBC reported that personal loans and the credit card debts had shot to £119bn within the two years.
Most of which resulted from higher purchase debts and student loans, from the above debt refinancing might be the solution but let us not forget that it also has its downsides, which could possibly get you cornered into another debt. Britain has overtime struggled with the household debt crisis, and a good number of families use up almost half of their income to settle debts.
Another problem that seems to be contributing to the increasing poverty levels are the lenders that charge very high-interest rates. On the other side, people are struggling with insecure jobs that come with low income, not to mention the social security cuts that render the common man poor, as they can barely cater to the basic needs.
The debt crisis has cut through the broad spectrum of livelihood, and businesses have also been caught in the web. Finding the right debt market is a hurdle on its own for business owners, they are, therefore, not able to raise finances to fund their debts in the most favourable terms. Another twist that keeps businesses locked with debts is the possibility of having multiple credit commitments.
The thing is that SMEs have many finance options, for example, they could access the peer to peer loans or the Merchant Cash Advances. So the many options make it hard for business owners to identify a good solution that will boost their cash flow. Refinancing comes in as an option when they take loans with high-interest rates from multiple lenders who offer a variety of customised products to keep business owners afloat.
Refinancing a business debt
The most viable way of refinancing your business debt is to first ensure that the interest rates are manageable. Remember that business rates can go as high as 72% per year and as low as 3%, a fact that is highly dependent on the lender. So if you can access the low rate loan for your business, then you will be able to save some good cash and with that in mind, it would be good if the borrowing rates and types of lenders are reviewed.
Businesses can also cut on the total interest that they are to pay, by keeping the term of the borrowing short and minimising their monthly costs. Refinancing helps get rid of the confusion that arises with keeping numerous tabs on outgoing cash, so when you refinance your business debts into one loan the stress of managing your finance is obliterated.
Money from loans should do the work that they were meant to do because this is the only way that you will have consistent cash flow in your business. Your business might have some muscle in terms of staff and clients but when the cash coming in doesn’t flow in the right direction then things will spiral out of control sooner.
Another important factor to keep in mind when you are refinancing your business is that the repayment has to be in line with how your business operates. Most businesses have low and high seasons, now if the repayment cannot be adjusted to coincide with the low seasons then you are going to have a problem.
Mortgage refinancing can be a bitter-sweet pill; the bitter part is if you are a serial refinancer then you can rest assured that it will affect your credit score. If you are not planning to stay put don’t refinance your mortgage, if your credit is weak, or if the closing costs are too high for you then just quite refinancing your mortgage.
Lastly, if the long term costs outweigh the savings that you have then keep off refinancing. The sweet pill in refinancing your mortgage is that you get low monthly payments, and this you can achieve by extending the predetermined pay off date, which means that your monthly principal submission goes down.
You could also shorten your term, for example, if you began with a 40 year home loan and refinance it at a 20 year fixed mortgage rate that is after a couple of years; you will be able to pay it off faster and save money on interest during the life of the loan. The only reason anyone would want to refinance their mortgage is that they are looking for a better rate.
To do this, however, you have to be on the lookout to see if the rates have fallen, since the last time you took the loan. If they did fall then by taking a new home loan with the current rates you will be able to save money.
Debt Paying Tips
In the current life, it is highly unlikely for one to live through their shelf life without incurring debt, maybe the royals, I don’t know. But what I know is that no one likes being in debt, life may at times be hard, but having a plan to pay off debts is better before they turn into problem debts. Normally people pay debts that they took to start a business or do something significant that can impact their lives positively in the future.
That’s not the case, these days because people, especially those on a low income, take loans just to feed their families or offset huge medical bills; meaning that it will never get better but we can find ways and means of reducing them slowly some of which I will discuss below.
Types of Debts
The first thing that you need to do before you make a plan to offset your debts is to determine which type of date you have. Problem debts – are the types of debts that exceed your income, and you have no idea what you spent the money on. And in most cases, you will be struggling to pay them back.
Managed debts – are the types of debts that do not exceed your yearly income, you can manage to pay them off promptly, and you can also account for their expenditure. With this insight, you could find ways of staying afloat as you pay off the problem debts.
Check eligibility for tax credits
These are the benefits from the state that cater to people who are on low income, those who take care of children and disabled workers. The determinant of whether you qualify or do not qualify is your household income and other circumstances; the loans are therefore available in two types the child and working tax credits.
Are you eligible for benefits?
Many people don’t like to be associated with the word benefits, as it makes them seem like they have failed in providing for themselves, but what they don’t realise is that not all benefits are for the poor people. There are some people without money issues and do get benefits from the government, which goes a long way in supplementing their income.
To be able to know if you have benefits from the government use the comprehensive calculator, will help you determine what you are eligible for.
We never know when tragedy will strike, and there are also many ways of rising out of debts when you feel totally subdued and one of the ways is to seek help from your local council. What you need to do is check how you can be helped from your postcode area via the Charity Lasa search engine.
What’s more, is that if you are claiming benefits like income support, then you might be able to access the budgeting loan and payback will be deducted from your benefits.
Your Landlord could also apply for alternative payment arrangement (APA) that is if you are having problems with paying your rent, with this option you could get paid more than once in a month, and your rent could be paid directly to your landlord. Split payments are also available if you are part of a couple. The UK Government has many benefits that could help you out when you are struggling to pay debts.
Debt reduction methods
Take note of the minimum credit card repayments
Minimum credit card repayment is the least amount that you should pay back as per your credit card each month that is of course to avoid a penalty. The trick here is to not only pay the minimum because it will take longer to clear and you will be charged more or rather it will cost you more. You will also be dragged down because of the many years that you will take to clear your debt and your credit score is also bound to suffer.
Monitor increase in your credit card APR
Card companies usually charge interest whenever you withdraw money from an ATM or pay for goods or services. They might, therefore, decide to increase the interest rate without notifying you first, so to be on the safe side, make sure that they give you information prior to, that is at least 30 days earlier. You can then proceed to reject the hike and pay what you owe and cancel the card.
Counter the overdraft debts
Chances do exist that you might go over the recommended overdraft and this will attract a good number of extra charges that will most certainly rip your pocket apart. So if there are any chances that you might exceed your overdraft limit, you can ask the bank to increase your overdraft limit so that you stay on the safe side. Lets now move over to loans.
Be keen with the secured loans
This is the type of loan where the money is secured over an asset, now with this type of loan you stand to lose your assets, so the best thing is to first try the unsecured loans. Remember that the secured loans usually cover property most likely a mortgage and if you cannot keep up with the payments as agreed then you risk losing the house.
Don’t engage the payday loans
They are the small loans that will push you until the next payday. Most people get this type of loan when they are desperate, but remember the interest stands at 1,300%, quite expensive don’t you think. You might, therefore, have to depend on the payday loans without necessarily being able to provide for yourself. But you can avoid getting into such kind of a mess via your authorised overdraft or get a loan from your local credit union.
How about the credit unions personal loans
Credit unions have been known to offer low rates for personal loans. They do charge interest on a reducing balance of the loan; therefore, if you can afford to pay it on a weekly basis then your overall interest will be greatly reduced. You might also be lucky to find a credit union offering 1% on a reducing balance with a loan of APR 12.7%.
Consolidate your debts
Here you will merge all your debts into one personal loan which will then reduce your monthly repayments, this reduces confusion and forgetfulness as you only have to repay one person.
Bankruptcy is the last nail on the coffin when all your struggles to pay off debts fail, so when you decide to declare yourself bankrupt, you will have to pay 680 pounds, and all your assets will be disposed of including your house or car if you have any. The effects will impact your life and those of your family rather too harshly, so before you settle on this go to Citizen Advice and find out whether this is the right option for you.