If you’ve already accumulated one or several loans with a high interest rate – such as a credit card – you may find yourself struggling to make more than the minimum repayments. In these situations, it can be useful to see if you could potentially restructure your existing debt to better your financial situation.
Debt restructuring is a complex process and is not one to be undertaken lightly. To ensure that you’re making the right decision for your finances, think carefully before signing anything and keep a few things in mind during the process. We’ve put together a few tips to help you through this period. Read on to learn more.
Closely compare the interest rates
The first and most important factor to consider is the comparative interest rates between the loan you’re considering and the average interest rate across your current debts. This can require some long, hard mathematics, but spending the time here can potentially save you money and stress down the line. Figuring out your average interest rate is easy thanks to many online calculators, then it’s as simple as putting it next to the interest rate for the consolidation loan and finding out which one is lower.
Factor in fees and additional charges
It’s important to understand that there may be costs to through the life-cycle of the loan outside of the principal and the interest itself. Many lenders charge fees for opening the loan, and some for closing the loan early, making partial payment, making electronic payment, as well as late fees and other charges.
Some lenders may provide a comparison interest rate, which is an adjusted rate helping consumers get a truer picture of the cost of the loan. This is usually the base fixed or variable interest rate, plus the application fees and other mandatory expenses, and does not usually include incidental costs like late fees. Comparison rates make it easier to shop around, especially where you’re certain of your ability to repay in a timely manner in accordance with the lender’s wishes.
Understand the differences between an unsecured and a secured loan
if you’re transitioning from a series of unsecured loans – loans taken without the provision of goods as collateral – to a secured loan – those with the provision of collateral – it’s important to understand the differing penalties for delinquency. In the event of bankruptcy, lenders for secured loans will be able to claim the item provided as collateral. Depending on the value of the loan, this could be a car, or a home, or a business. Know the consequences for loan delinquency before you sign anything.