How you can improve your credit rating with a debt rescheduling
The rescheduling of your existing business loan can be useful for many reasons. Both your credit rating and the interest rates offered by the banks change over time. You can use these changes to your advantage to improve your creditworthiness and to save money.
Benefit from lower loan interest rates through debt rescheduling
Older loans with a higher interest rate can be adjusted to a new, usually lower interest rate level by rescheduling. This can also often reduce the rate or shorten the term. The bottom line is that you can save a lot of money over the term. If your credit rating has improved during the term of your existing loan, you can show the bank your good financial position as an argument for an adjustment of the credit conditions. Your improved credit rating ultimately reduces the risk of default, which in turn is linked to lower interest rates.
However, you should check in your credit contract with the bank exactly which clauses you have agreed on rescheduling, prepayment and special repayment. Many banks require a so-called prepayment penalty. This fee is charged if a borrower wants to repay the loan unscheduled or to reschedule.
Prepayment penalty can become a cost factor when rescheduling
This aspect is often neglected when making an application, since one is in a stressful situation at the time of the loan requirement and is often happy to get a loan at all. The fine print can get out of sight. However, the costs that a bank can charge for this are limited. In the event of a prepayment, no more than 1% of the remaining debt on your loan may be claimed.
Debt rescheduling on an installment loan is worthwhile
However, if you frequently need short-term money and rely on credit cards and the overdraft facility (“overdraft facility”), caution is advised. Overdraft facilities, like credit cards, are very expensive. In particular, if you pull cash over a credit card, it can cost up to 20% interest. Of course, urgency is a key argument for an entrepreneur, but you should be aware of the costs. A smaller installment loan of $ 10,000 with 5% interest is much cheaper than regular use of the overdraft facility – you often even pay less than half in total.
Use of the overdraft facility is rated negatively by banks
If you need a larger loan later, the banks take a close look at your account history and immediately recognize if there is regular use of the overdraft facility. While this does not directly affect your credit rating, it does have a negative impact on the assessment of your creditworthiness from a bank’s perspective.
Regularly repaid installment loans have a positive impact on creditworthiness
In contrast to short-term sources of finance, installment loans repaid on a regular basis and in good time are a positive factor influencing creditworthiness. Banks assume that a reliable debtor will continue to reliably pay his debts in the future.
Conclusion: With regard to your credit rating, you are better advised to take out a smaller installment loan than with short-term financing options via credit card or overdraft facility. Your bank rates this positively and you can also save a lot of money.