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The personal debt swap

Published:Sunday | February 14, 2010 | 12:00 AM

Avia Collinder, Business Reporter

With the financial crisis in Jamaica deepening, individuals and companies alike might find themselves facing the question - like the Government itself - of whether they can really carry the burden of debt which is on their books or monthly budget.

Could it be time to refinance or to find cheaper sources of funding to be repaid over longer and more manageable terms?

Refinancing involves searching for both cheaper funds, that is, lower interest rates, and better terms, including a longer repayment period for existing debt.

These funds or better terms can come from your existing creditor as well as an alternative source.

flirting with bankruptcy

While you might have been panting to get rid of the debt in the short term, getting better terms now might allow you to survive the financial crisis, instead of flirting with bankruptcy.

Dave Dixon, personal financial adviser and branch manager with Scotia DBG, advises that when seeking refinancing, you should ask yourself what the benefits are to refinancing the existing debt.

Individuals refinance for different reasons, such as a lower interest rate, to obtain additional funds, to extend the maturity date with lower monthly payments, and to consolidate existing higher-rate debt for lower ones.

If you are in a fixed-rate loan contract at much higher rates than available, then you should review the terms and conditions of the existing loan to see what the penalties are, if any, for early closure.

The next step would be to talk with your financial institution to verify the costs involved in refinancing the existing loan. The decision to refinance should only be made, Dixon states, if after close examination of all the facts, such as interest rate, processing fees and terms of the new loan, you are realising some amount of savings from the process.

You should also be looking keenly to see if the cost of obtaining the new loan exceeds the savings from a lower monthly payment over the term of the new loan.

If it does, Dixon states, then you should not refinance.

"Sometimes we make the mistake of just comparing the interest rate and not looking closely at the cost associated with obtaining the new loan," he said.

It is also very important that you channel the savings from the refinancing to some form of investment, instead of looking at it as additional money to spend.

Dixon points out that unsecured loans are usually at much higher rates than loans that are secured by real estate, cash or other tangible assets, and should be utilised if available. Can you get better terms by offering to secure your existing credit-card debt in a new term loan?

If so, you should try it.

If you are only able to pay the minimum payment on your credit card, then you should also consider refinancing, as the interest cost is usually much higher than a term loan.

It is also important, Dixon states, that the card be closed after refinancing in order to avoid a repeat of what happened before.

It is to be considered that in an environment where rates are on the decline, then a variable rate loan is the better option than fixed rate, as this would reduce your payments whenever there is a reduction in lending rates.