Replace Old Debt With New Debt
In this article, I will describe a method of working with money, that many managers use nowdays in company takeovers and that can be used by “regular” people for their home finances as well. I will explain how does “replace old debt with new debt” method works, what are the benefits of it and what are the bad sides of it. Please note that using this method does not make your debt go away, it just takes the deadline of repayment away.
Let’s start by giving an example. A “rich guy” buys a company for 10 milion euros. He doesn’t have that kind of money on his hand so he needs to take a loan. But that loan is really big and debt management will be hard in few years when time comes to pay it back. What will he do? He won’t pay it back at all! How will he do that? Let’s take a look.
Let’s suppose that this debt is set to be repayed in one time payment (not on montly bases) and that it has to be payed back 10 years after he took it. He also needs to pay interest rates every year, which are 5 % of the total debt. What happens after 10 years? He does not have money to payback that debt so he takes a new loan from a different bank and uses that money to repay his debt towards the first bank.
By doing that every ten years, he got 10 milion euros in exchange for paying 5 % of that every year. And in case he makes more than 500.000 EUR (5 %) each year, then he’s making a nice profit. Sounds too good to be true? Well it kind of is, because noone will give you that kind of loan. But the principle works no matter what the amount is.
Benefits of this method:
- investment capital
- power to run the company
- option to repay the debt if he wants
- there is no risk for him involved, because he did not invest his money
Downsides of this method:
- noone will give loans of that size to “regular” people
- bank will take your house or whatever you have “putted” in exchange for a loan, in case you do not get a new loan in time
This was a short description of replace old debt with new debt method.
Written by: Matt
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Tagged as debt, debt management, family finances, financial debt management, money, money management, save money + Categorized as Other, Business economy, Economy articles, Other, Investment economy