What Is Debt Rescheduling?
Debt rescheduling is what happens when you have debt but can’t afford to pay it off. In this situation, the lender may agree to extend the due date or lower your monthly payments in order for you to be able to make them.
However, what’s more, important than what is happening with your current debts is what will happen with future debts if you don’t change anything about how much money you’re spending and where that money goes. It’s a myth that only highly intelligent people are creative.
In fact, research shows that once you get beyond an I.Q of about 120, which is just a little above average, intelligence and creativity are not at all related. That means that even if you’re no smarter than the average bear, you still have what it takes to crank out some creative thinking about your financial situation.
So what is debt rescheduling? Let’s find out.
A brief overview of debt rescheduling
Debt rescheduling, or loan rescheduling, is the legal expression used to identify a change in the terms and conditions of outstanding debt. The need for this occurs when a borrower encounters difficulties in meeting their financial obligations. The debtor could be anyone from a struggling business to a less-developed country. The primary purpose of rescheduling debt is to give some breathing room to the company in distress by making alterations to the agreed-upon principal repayment system.
In other words, debt rescheduling is “the process of restructuring the terms and conditions of an existing loan’s repayment timeline to prevent a major financial turmoil for challenged businesses and countries.”
How does debt rescheduling work?
Now that you know “what is debt rescheduling,” let’s understand how it works with a two-clause description:
- The outstanding debt can be rescheduled by extending the repayment period, dividing the amount that needs to be paid into an increased number of payments.
- The payments can be paused or reduced during an agreed-upon timeline, followed by an increased amount in the next monthly installments.
This helps the borrower adjust their accounting and repayment plan while not having to default on their loans. However, it’s best to keep in mind that it could also result in paying more interest on your loan in the long run since you will be servicing your debts for a longer period.
How does debt rescheduling differ from debt restructuring?
While the process of rescheduling debt is straightforward, many people still make the mistake of confusing it with debt restructuring. This is not surprising, considering that when you refer to the dictionary to follow up on their written definitions separately, you might not see much of a difference between both terminologies at first glance. However, upon further elaboration, you’ll realize that there is a major distinction between both terms. To put things into further context, let’s review why debt restructuring should not be mixed with the rescheduling phenomenon.
Debt rescheduling means extending the date of an existing loan tenure, which results in more monthly installments but for a lesser amount each month or inducing a pause with larger repayments afterward. However, unlike rescheduling, loan restructuring is utilized by individuals, businesses, and countries looking to prevent defaulting on existing debts by negotiating “lower interest rates” instead of tweaking the timeline.
Simply put, the latter process wholly restructures the existing loan type to improve the borrower’s current cash flow. A practical example of this could be turning an overdraft into term loans.
Why do countries need to reschedule debt?
You might have heard about a lot of people running into credit card or mortgage-related payment problems, even coming close to bankruptcy at times. However, have you ever witnessed the same problem occurring on an international level? Of course, credit cards and mortgages may not be the issue on hand when countries deal with financial turmoil. Nevertheless, encountering a debt problem for them is not as negligible as you might have thought.
For a number of under-developed countries, taking on sovereign debt is the only way to move forward. However, things may also go sour at a rapid pace when the finances aren’t dealt with responsibly.
What is a sovereign debt?
“A sovereign debt, also referred to as a government or national debt, is a loan issued by the National government in the form of a foreign currency so the country could grow and develop adequately.”
For countries still developing their economies, issuing a sovereign loan is usually similar to a business striving to finance its growth. The primary difference is that while business loans are fairly small, sovereign loans likely cover billions of American dollars. That’s also what makes it extremely challenging to pay back the amount in the designated time.
When this is the case, a country may have to use debt rescheduling to extend the date if they want to make timely principal repayments. For instance, due to the pandemic, we’re witnessing increased loan suspension happenings in 2021. The United Nations chief has also put out a proposal to suspend mid-income nations’ debts into 2022 since these countries are already struggling with mounting debts as a result of COVID-19.
The current financial instability of several emerging economies in 2021 is proof that debt rescheduling might be these countries’ last hope to save themselves from a massive financial disaster.
Benefits of rescheduling debt for businesses
Debt rescheduling can bring plenty of benefits to American and other country businesses. That said, here are the primary advantages of getting your loan rescheduled:
1- Keeps the company afloat
When a debt persists for a long time, it sinks your company automatically due to the payments burdening your already packed finances. However, with debt rescheduling, you can settle for more content and favorable terms by working on a timeline that suits your needs better. Once you have a new action plan for making repayments on steady feet, you can focus upon improving your cash flow and deal with the associated interest rates moving forward.
2- Ensures better financial management
It can be challenging to manage your personal expenses, including electricity bills and mortgage payments, when they come in at varied times of a month. Similar is the case with business finances when you have to deal with multiple loans at once, affecting your company cash flow. However, once you cut down your payments in smaller chunks over a designated time or wait until you have money before making increased payments every month, managing business finances gets much better.
3- Protect company assets
Lastly, when you take on a loan, you always have to provide collateral. Making large repayments every month can take a toll on your overall budget and throw you off your game. Instead, when you use debt rescheduling, the risk of creditors rushing to take your listed assets significantly decreases. That’s because when you can make repayments on your chosen timeline, it becomes unlikely to miss a payment.
Limitations of debt rescheduling for businesses
On the contrary, there are also some valid limitations of debt rescheduling that businesses should know about before making any decision. These include:
1- May affect credit score history
While debt rescheduling helps your case in the present, it doesn’t reflect good numbers on your credit score history. It makes you look bad in the eyes of any other lender who you might have to contact for help afterward.
2- Prolonged repayment period
Since the future is always dynamic, you have to consider that even with short monthly payments, you may not pay off your debt for one reason or another. Since debt rescheduling prolongs your repayment period, it could cause you issues to pay on time when you’re hit with financial emergencies that leave you stranded to make ends meet.
3- More expensive
Lastly, when a debt is distributed over a prolonged timeline, you also have to factor in the extra interest charges. The longer it takes you to make the repayments, the more likely you’ll be making massive interest payments in the future.
Considering all pros and cons of debt rescheduling, it’s best to work out whether you can afford to choose this path before agreeing to anything!