It involves taking out a new loan to pay off your old ones. This can be a great option if you are struggling to make your monthly payments or if the interest rates on your current loans are too high. In this blog post, we will discuss what debt refinancing is and how it works. We will also provide some tips on how to decide if it is the right option for you.

What is debt refinancing?

Debt refinancing is a process that allows you to consolidate your existing loans into one new loan with more favorable terms. Essentially, it involves taking out a new loan to pay off your old ones. The term "refinancing" refers to the process of combining multiple debts into one new loan and paying them off all at once.

How does debt refinancing work?

There are several different options for debt refinancing, depending on your current financial situation and the types of debts you have. One common scenario is when you are struggling to make payments on multiple high-interest credit cards or personal loans. In this case, it may be beneficial to refinance these loans by taking out a new loan at a lower interest rate. This strategy can help you save money on your existing debt over time and make it much easier to keep up with your monthly payments.

The process of refinancing usually involves working with a financial institution or lender, such as a bank or credit union. You will need to provide documentation verifying the value of your assets, income, and debts to secure the new loan. When this process is complete, you will typically receive an updated loan agreement that lists all of the terms for your new loan. At this point, you can begin making regular payments on your new debt instead of your old ones.

Should I refinance my debts?

Refinancing may not be right for everyone, and there are several factors to consider before deciding whether it is a good idea for you. One important consideration is your credit score. Having a high credit score can make it easier to qualify for a new loan with favorable interest rates. However, if your credit is poor or limited, you may have more difficulty securing a new loan at an affordable rate.

Another factor to consider is the type of debt that you want to refinance. Some loans, such as student loans and mortgages, cannot be refinanced using this strategy. You will also need to decide how much debt you want to repay with your new loan. Depending on your financial situation, you may choose to pay off all of your existing debts, such as making minimum payments on medical debt, lowering your credit card debt, or just certain ones that have high-interest rates or are otherwise problematic.

Are there any benefits?

Refinancing your debts can be a great way to save money, especially if you have multiple high-interest loans that are difficult to keep up with. By taking out a new loan at a lower interest rate and paying off your existing ones all at once, you may be able to reduce the total amount of money you owe over time. This strategy can ultimately help you get out of debt faster and improve your financial situation overall. Other benefits of consolidating debt are that it simplifies your monthly payments and may provide you with more flexibility in choosing repayment terms. For example, you may be able to opt for a longer repayment period, which can reduce your monthly payments.

3 Tips for refinancing your debts successfully:

1 - Evaluate your finances:

Before proceeding with debt refinancing, it is important to carefully evaluate your current financial situation and make sure that this strategy is right for you. Consider factors like income, credit score, and outstanding debts before deciding whether to refinance your debts.

2 - Shop around for a loan:

There are many different options when it comes to refinancing your debts, so it is important to shop around and compare rates with various lenders before choosing one. This will help you find the best possible deal on interest rates and repayment terms.

3 - Understand all of the terms in your new loan agreement:

When you apply for debt refinancing, make sure that you understand all of the terms listed in your new loan agreement. This will help ensure that you are fully aware of any fees or penalties associated with your new loan as well as potential changes in monthly payments or other factors that may affect how much money you owe over time.

Debt refinancing can be a great way to save money and get out of debt faster. By taking out a new loan at a lower interest rate, you may be able to reduce the total amount of money you owe over time. Before deciding whether this strategy is right for you, it is important to carefully evaluate your current financial situation and make sure that you understand all of the terms in your new loan agreement.

Company voluntary arrangements (CVAs) have been a mainstay in the financial news over the last six months due to their status as the restructuring tool of choice for many of the UK’s high street stores. House of Fraser, Mothercare, New Look and plenty more retailers besides have all used CVAs to try to renegotiate their existing debts with unsecured creditors. But with this increasing use has come more scrutiny, with a number of parties unhappy with the way the current system works.

Are CVAs fit for purpose?

There is growing concern among a number of parties that CVAs, as they stand, are being abused. Company voluntary arrangements are an insolvency tool that’s designed to give struggling businesses more time to repay their debts and an opportunity to restructure away from the constant threat of legal action from creditors. However, they are increasingly being seen by creditors as an easy way for businesses to avoid administration and downsize their operations to the detriment of their creditors.

Landlords, in particular, feel like they’re getting the raw end of the deal. That’s because many struggling retailers, with House of Fraser being a recent example, are using CVAs to force reductions in the rent they pay and even break leases to close stores. It’s not only landlords who are feeling aggrieved. Other retailers that are battling to stay afloat are having to watch their rivals secure lower rents through CVAs while they are left to pay the going rate.

Landlords feel they’re not having their say

For a CVA to be put in place, it must receive the approval of 75% of the company’s creditors by the value of debt. However, while it is only unsecured creditors that will be affected by the terms of the CVA, secured creditors like banks and other financial institutions are still allowed to vote on the proposals. That means many CVAs are being approved without being accepted by landlords and other unsecured creditors who will take the financial hit.

Landlords are also concerned that CVAs are not always being used by retailers as an absolute last resort. Some landlords claim that retailers are not ‘on the cliff edge’ and are simply seeking a way to reduce their debts. This is often to the detriment of landlords and the benefit of the retailers’ shareholders. As an example, House of Fraser asked its UK landlords to accept a 30% rent cut, yet in the same month it opened a new 400,000sq. ft. store in China.

What reforms, if any, are needed?

The insolvency trade body R3 recently published a report that evaluated the success and failure of CVAs and recommended some changes that could be made to make the process more attractive. The report made a number of recommendations:

• CVAs should not last longer than three years without good reason.
• The duties of company directors should be made clearer and include a requirement to address financial distress immediately.
• CVA documentation that’s filed at Companies House should be more transparent and informative.
• Public sector creditors that vote on the CVA proposal should have to explain their decision fully if they refuse to support it.
• Standard terms and conditions for CVAs should be made available and adopted.

This will provide some relief to landlords who will be pleased to see the recommendation relating to director’s duties and the requirement to address financial distress earlier. They will also be reassured by R3’s agreement that CVAs in their current form are too long.

As yet, there’s no indication as to whether the recommendations are likely to be implemented. However, the report does make a strong case for the government to look again at the CVA process and implement at least some of the reforms.

Mike Smith is the Senior Director of Company Debt and a turnaround practitioner who specialises in giving small and medium-sized businesses debt advice and guidance on CVAs.