It is common for people to want to refinance their debts in order to lower their commitments. For people paying high interest rates on facilities such as credit cards and personal loans the benefits of rolling all their debts into one single loan has the potential to reduce their outgoing significantly.
There are a number of factors that determine how much money people can borrow, factors such as income, credit rating and security value are all determining factors.
Unfortunately it is quite common for people to find that the loan amount they have been approved for is not sufficient to retire all their debts. Unless they have access to sufficient funds to pay the shortfall the refinance is unlikely to proceed.
The truth is in many cases unsecured creditors can be convinced to reduce their payout figures to allow a refinance to take place.
There are very few situations were being behind in payments is a positive thing however with debt negotiation it can be beneficial. As you can imagine, if a credit provider is owed an amount of money and the payments on the debt are up to date they are bound to be resistant to lowering the payout figure, they can have a very different attitude when an account falls into arrears however. With unsecured debt particular creditors are exposed the moment payments fall behind and the account will be instantly identified as a threat.
Imagine a situation where an account has fallen into arrears and the creditor learns that the debtor has become ill, been made redundant, is leaving to live overseas or has over committed themselves with other debts. At this point the creditor is in danger and other than listing a default or commencing recovery action their options are very limited to recover debt. For this reason they can be pliable when it comes to negotiating a reduction of the debt.
Consider the following scenario:
Mary has a number of unsecured debts she is struggling with.
Credit card 1 $10,000.00
Creidr card 2 $15,000.00
Personal loan $25,000.00
Mary was recently retrenched and despite the fact that she did find employment quickly her income is less than her previous job. Because of this the payments on these debts have fallen behind. Due to this the loans are subject to penalty interest and the amount balances are growing quickly.
Mary has arranged a refinance loan of $375000.00 that is to be secured by her home – due to her lower income this is the maximum she can can borrow.
Her current mortgage is $350,000.00 so she is $25,000.00 short of being able to retire her unsecured debts which is the whole point of the refinance.
Many people in this position feel they have no options however the reality is there is a very good chance the creditors will agree to reduce their payout figures if they are approached in the right way.
From Mary’s creditors point of view they have two options a) they can agree to lower their debt by 50% and allow the refinance to take place and get paid or b) not agree and hope that things work out and Mary somehow finds more money and brings the accounts into order. Remember creditors such as banks need to report on their non-performing accounts so the prospect of clearing the account will be taken very seriously.
When faced with a loan approval from a credit provider they can recognise many credit providers will agree to reduce their debt to allow the refinance to take place as the prospect of getting paid something is better than the alternative.
Because of this loan shortfalls need not always mean the facility cannot proceed.