Loan consolidation can be a useful way to reduce monthly payments and free-up cash for your business. The fintech world is alive with options to transfer multiple, expensive loans to a single, more manageable single lender. The capital sum will remain the same but the amount of monthly repayments may be reduced significantly.
Advantages of loan consolidation
The main advantage of replacing a number of loans, from various lenders, with a single lender is that it may be possible to obtain a lower interest rate and/or lower monthly payment under the new agreement. Dealing with a single entity with regard to your loan will provide a much simpler way of managing the debt. Having lower monthly outgoings may free-up cash for use within your business.
Disadvantages of loan consolidation
In order to free-up cash, the repayment term of the loan may have been extended. It should be remembered that while the monthly repayments may be more manageable, the period of time before the loan is fully cleared could be substantially increased.
Loan consolidation and refinancing
The terms ‘loan consolidation’ and ‘refinancing’ are often considered to be the same. However, there may be some differences between them. An example would be where a loan is paid off by taking a loan from another lender that offers a lower interest rate. That would be considered as refinancing. Debt consolidation is a situation where a number of individual loans are ‘consolidated’ into one single loan. The difference between this situation and refinancing is that the consolidation may, or may not, offer a lower interest rate but could reduced the size of monthly payments. This could be useful where a business requires to improve their cash flow situation.
Yhdistä laina should not be entered into lightly, a full overview of the reasons for considering such a move can be found on fintech company Zmarta website, before making any changes to financing. The company who made the initial loan may wish to make a charge for early repayment of their loan. Under these circumstances you may find that you are paying interest on a new loan that includes a payment for interest on the existing loan, a form of compound interest. Extending the period of repayment, with the new lender, may result in a larger sum being paid out for the loan. In the case of a business, there may be benefits to this if cash is freed up that is then used to earn more money income.
Is debt consolidation suitable for you?
Consolidating a number of loans with a single lender may seem to be a great idea, however, the following should be considered.
- Current Interest Rate of Loans
- Credit Score
- Business Performance
- Business History
The current interest rate of existing loans should be examined to assess if there will be an advantage to replacing a number of loans with a single loan.
Credit score is an important factor for individuals and small businesses as a healthy credit score will be reflected in the amount of interest asked for by the lender.
Business performance will be crucial in a lender setting an interest rate. If you can show an improving performance then it is possible to negotiate a more advantageous rate.
Business History will impact on any decision made by a lender. The length of time a business has been able to successfully trade will be a vital part of any decision made by a lender.
The advent of the ‘fintech’ businesses has provided a much wider market for companies who are considering consolidating their loans. Traditional lenders have often been reluctant to lend where a large number of high-interest loans, acquired from a wide range of source, are being consolidated into one. The fintech lenders are more likely to give the go-ahead to a consolidation loan and this has prompted some of the more established lenders to also rethink their positions.
Before taking any action it is important to make sure you understand the difference between consolidation and refinancing. Increasing the duration of a loan may reduce monthly payments but result in the loan being extended for many years. A business may be prepared to accept such a situation for the huge benefits it may gain from a much-improved cash-flow. Individuals and small businessmen man not be able to obtain the same benefits and this could result in the loan becoming a burden over a long period of time.
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