What is meant by a refinancing or a refinancing loan?
Refinancing or credit repayment is the early repayment of a loan by a company with a financial institution (for instance, a bank), in favor of a loan with another institution. Loan restructuring can reduce the interest burden by replacing old loans with a new one with lower interest rates.
The bank calculates the remaining debts on the basis of the conditions regulated in the credit agreement. These are based on the remaining term of the contract and the interest payments lost by the financial institution. When deciding on refinancing, existing costs and conditions, as well as own liquidity needs and the credit conditions of the new loan must be taken into account.
How does a refinancing loan work?
Credit agreements regulate the conditions for early repayment of a payment obligation. The bank thus secures compensation for the interest loss through early repayment (so-called early repayment compensation). The debtor calculates the remaining debt due and compares it with new providers on the basis of his own credit requirements. With better conditions, a new contract is concluded and the old one is processed.
More about calculations on https://lendingbeeinc.com/blog/cost-of-debt-calculator-all-you-should-know.
When does a refinancing loan make sense?
Refinancing a loan is worthwhile if the new modalities allow a reduction in the interest burden. This applies in particular to older loans whose maturity is due and which are characterized by higher interest rates. In this way, the credit environment may have changed or the creditworthiness of the company may have improved in the meantime. As a new customer at a bank, a company can also benefit from better conditions than is possible as an existing customer.
Refinancing loan: advantages and disadvantages
Advantages of refinancing
Since the conditions of refinancing are contractually regulated in advance and the entrepreneur can independently look for alternatives, it is possible to repay expensive loans at an early stage. This makes it possible to benefit from low interest rates, agree on new payment methods and negotiate new credit conditions. Through refinancing, the company can respond to changed circumstances and enter into new contracts individually. The main advantage is thus the possibility to save interest through a new loan and to process old loans cost-effectively.
Disadvantages of refinancing
The existing commercial bank can claim a contractually regulated early payment compensation in order to be compensated for the lost interest payments. Depending on the conditions of the contract, this compensation can be high and can be very different. The repayment can also result in a higher organizational effort in the search for refinancing. According to the info by lendingbee, additional costs may arise for mortgages for real estate in which the property is deposited as collateral.
Example of a refinancing loan
For corporate financing, a company has taken out a loan of 100,000 USD at an interest rate of 7% with a term of 48 months. After 24 months, this loan will be refinanced. The contractually stipulated early repayment compensation provides for a residual interest of 4% over the remaining amount of 50,000 USD, with the interest saved from the difference between the different interest rates amounting to 1,500 USD. The outstanding loan amount of 50,000 USD is now refinanced at an interest rate of 2% over 24 months. The interest payments of this loan amount to 1,050 USD, which results in a financing advantage of 450 USD.
Redeem a loan and refinance it
With a refinancing loan, it is possible to refinance old loans cost-effectively. This can reduce the interest burden on the company. Depending on the liquidity needs of the company, 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 benefit from the improved conditions of refinancing. In this way, they contribute to the successful and long-term sustainable financing of your company.