Prolongation and debt restructuring - the differences, simply explained

Prolongation and debt restructuring are terms that are often confused. This applies in particular to people who have not undergone any commercial training.

In the following, you don't need any special training to understand the differences. We explain it briefly and simply, including the advantages and disadvantages.

Basically, prolongation and debt restructuring are two different ways to extend the term of a loan or to adjust the conditions.

The renewal

In the case of a prolongation, i.e. an extension of the loan term, the conditions such as the interest rate or the repayment rate remain unchanged. The monthly rate, i.e. the monthly payments, remain the same. However, the interest and principal payments have to be made over a longer period of time because the total term of the loan has been extended.The extension of a loan is usually associated with no additional costs. However, the lender benefits from the interest that continues to be paid over the longer period of time.An extension of the term can be advantageous for the borrower if, for example, follow-up financing has not yet been found or the financial situation does not currently allow a higher monthly burden.A longer term also means that the borrower is tied to the loan and the obligation associated with it for longer.In any case, the pros and cons of extending the loan should be carefully considered before making a decision.

The debt restructuring

In a debt restructuring, not only the conditions of the loan are adjusted.Fundamental changes are also made to the loan agreement.This can be, for example, a reduction in the interest rate to lower the monthly burden, but also an extension of the loan term to lower the monthly installments.Debt restructuring is an option if the interest rates on the market have become cheaper and you want to benefit from the improved conditions.In this case, it is worth negotiating with the bank to adjust the loan agreement in order to reduce the burden of monthly repayment. Through clever negotiations, it is often possible to change both the interest rate and the term of the loan and thus achieve more favorable conditions overall.However, debt restructuring does not always make sense. In some cases, the cost of a debt restructuring can outweigh the potential savings. In addition, the conditions for the borrower usually deteriorate with each debt restructuring, as the risk for the bank increases.Therefore, a debt restructuring should be well considered and all advantages and disadvantages should be carefully weighed.

Conclusion

The most important points are summarized here:

• Prolongation means extending the loan term with unchanged conditions

• The monthly rate remains the same, but the total term and thus the obligation are extended

• It can be advantageous for the borrower, e.g. if follow-up financing has not yet been found.It is beneficial for the lender as he earns interest for longer

• Rescheduling means adjusting the loan terms, e.g. lowering the interest rate or extending the term to lower the monthly rate

• Rescheduling can be considered if the interest rates on the market have become more favorable in order to benefit from it

• A debt restructuring does not always make sense, as the costs can exceed the savings and the terms can worsen for the borrower

• In the case of prolongation and debt restructuring, a new agreement with the bank is necessary, which will check the creditworthiness again