Restructuring debt can be a good way for people who have a lot of debt to save thousands of dollars in interest charges and reduce the amount they pay every month towards their debt. The process is extremely time-consuming, however, and can cost a lot of money up front. It is important to understand the process of restructuring debt in order to decide if this method is right for you.
Restructuring debt is the process in which a person refinances their existing loans into new loans with better payment terms. These terms can include longer payment periods, lower interest rates, and/or lower fees. Refinancing debt, however, is not an easy process.
To start, a person will need to make a list of his or her existing debts, along with their required minimum payment, total amount owed, and interest rate. Separate this list into categories by what the debt is secured by. For example, you might want to make separate lists of credit card debt, mortgages, and so on. Each separate list will most likely need its own loan to refinance the debt in that category.
For example, a credit card with an interest rate of 10% and a balance of $10,000 probably has a minimum payment of $250 a month. A person who wanted to restructure this debt could find a new credit card with an interest rate of 5%. Of course, finding this credit card with a high enough credit limit to transfer all of the debt will take some time to do. After successfully applying for and being approved for the new card, a person could transfer their debt to the new card. This essentially cuts their interest rate in half.
Of course, it is crucial that people who are thinking of doing this pay attention to the fees involved. It is usually customary for the new card company to charge a 3% fee on the balance that is being transferred. The person who is considering this card will need to make sure that he or she will still save money by transferring the debt.
The process for refinancing other debts, such as student loans and car loans, is similar. A person will need to find a new loan that he or she can transfer his or her existing debt to. In many cases, a single new loan can be used for several old debts. For example, a person can choose to take out a home equity loan to consolidate and refinance their credit card debt.
It is important to realize that restructuring debt can take hundreds of hours of research, paperwork, and bank interviews. At the end of the process, a person will often have lower interest rates, but their overall amount of debt will not have decreased. In fact, once new loan fees have been added in, a person will often have more debt than when they started the process.
People who are interested in lowering their total amount of debt should look at other options …