Refinancing / Breached Credit: Importance for Companies

What is meant by refinance or refinance loan?

Refinancing or credit repayment is the early repayment of a loan by a company with a financial institution (for example, a bank) in favor of a loan with another institution. Debt restructuring can reduce the interest burden by replacing old loans with new loans with lower interest rates.

The bank calculates the remaining loans based on the terms regulated in the credit agreement. These are based on the remaining term of the contract and the interest payments lost by the financial institution. While taking the decision to refinance, the existing costs and terms as well as one’s own liquidity needs and the loan terms of the new loan should be taken into account.

How does refinance loan work?

Credit agreements regulate the conditions for early repayment of payment obligations. The bank thus secures compensation for the interest loss through early repayment (so-called early repayment compensation). The debtor calculates the remaining loan due and compares the same with new providers based on their loan requirements. With better terms, a new contract is concluded and the old one is processed.

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When does refinance loan matter?

Refinancing the loan is worthwhile if the new modus operandi allows for a reduction in the interest burden. This is particularly applicable to older loans that have outstanding maturities and are characterized by higher interest rates. In this way, the credit environment may change or the credit worthiness of the company may improve in the meantime. As a new customer at a bank, a company can also benefit from better terms than an existing customer.

Refinance Loan: Advantages and Disadvantages

Refinance Benefits

Since the terms of refinance are contractually regulated in advance and the entrepreneur can freely seek alternatives, it is possible to repay the costly loan at an early stage. This makes it possible to take advantage of lower interest rates, agree on new payment methods and negotiate new credit terms. Through renegotiation, the company can respond to changed circumstances and individually enter into new contracts. Thus the main advantage is the possibility of saving interest through a new loan and processing old loans effectively.

Disadvantages of Refinancing

The existing commercial bank may claim regulated early payment compensation as stipulated for compensation for lost interest payments. Depending on the terms of the contract, this compensation can be high and vary greatly. Repayment may also result in a higher organizational effort in seeking refinance. according to Information by LendingbeeAdditional costs may arise for mortgages for real estate in which the property is deposited as collateral.

refinance loan example

For corporate financing, a company has taken a loan of USD 100,000 at an interest rate of 7% for a period of 48 months. After 24 months, this loan will be refinanced. The contractually stipulated early repayment compensation provides for a residual interest of 4% on the balance of USD 50,000, with interest saved on the difference between the various interest rates of USD 1,500. The outstanding loan amount of USD 50,000 is now refinanced at an interest rate of 2% over 24 months. The interest payment on this loan amount is USD 1,050, resulting in a financial gain of USD 450.

cash out a loan and refinance it

With refinance loans, it is possible to refinance old loans cost-effectively. This can reduce the interest burden on the company. Depending on the company’s liquidity needs, it is also possible to agree on new payment methods and, for example, to extend the term of the loan. Many credit platforms allow you to take advantage of the best refinancing conditions. In this way, they contribute to the successful and long-term sustainable financing of your company.