Recasting a personal or small business loan is when a borrower makes a lump sum payment (curtailment) toward their loan’s principal balance. The lender then recalculates the monthly payments based on the new, lower balance while keeping the same interest rate and terms. By reducing the principal owed, the borrower frees up future cash to invest back into their company and becomes more appealing to lenders if they’re looking to take another loan. Recasting doesn’t change the loan’s interest rate or maturity date, and it doesn’t require reapplying for a new loan.
Here’s an example. If the total amount of the loan is $150,000 and the borrower has already paid $50,000, the new principal amount for recasting is $100,000. Recasting loans normally requires a large lump sum and reduces the principal further. If the borrower makes a lump sum payment of $10,000, the lender will now recast the loan keeping the interest rate the same but changing the amortization schedule using the principal amount of $90,000.
A $150,000 loan with a 5% interest rate and 10-year payback period will have an estimated monthly payment of $1,591. By recasting the loan, the payments are now based on the $90,000 principal, lowering monthly payments to roughly $955.
The loan terms remain the same as it is still the same loan. The borrower just has a lower amount of debt and more cash available. This is like refinancing. However, while recasting keeps the current loan in place, refinancing gives the borrower an entirely new loan. Let’s look at the details.
The Difference Between Recasting and Refinancing Loans
Both recasting and refinancing loans can get the borrower into a better financial situation, but one replaces the old loan with a new one, and the other keeps the same terms.
|
|
Recasting |
Refinancing |
|
New or existing solution |
Keeps the existing loan |
Replaces the old loan with a new loan |
|
Upfront costs / closing costs |
Administrative fees |
Yes, the new loan will likely have closing costs associated |
|
Interest rate changes |
No |
Yes |
|
Eligibility |
Depends on the lender |
Available with most lenders, but the borrower needs another approval |
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Requires credit checks? |
No |
Yes |
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Paperwork |
Minimal |
Substantial |
When you recast a loan, you’re keeping the current loan you were already approved for, so there is no need for a credit check or a substantial amount of paperwork as you don’t have to go through the approval process again like you do when you refinance.
When you refinance a loan, you will get new terms that could include a better interest rate, which may save you money over time. Recasting a loan reduces your monthly payments to free up the amount of cash you have on hand each month, but you do not get a new or better interest rate. While many business owners may choose to refinance a business loan over recasting a business loan, recasting is still possible with certain lenders.
When to Recast a Loan
Recasting a loan makes sense when you need to increase the amount of cash you have on hand each month and when you can afford a large lump sum payment. By reducing the amount of debt owed, you improve your debt-to-income (DTI) ratio and make yourself a more appealing borrower.
By having a lower debt-to-income ratio, you have a better chance of being approved for credit cards, lines of credit, business loans, and other forms of financing. However, recasting does not directly improve your credit score — credit bureaus only see the reduced loan balance over time, not the loan recast.
A real estate investor who knows they’ll be purchasing their next property to flip may recast a current real estate investment loan so they can both free up cash for the renovations and show less debt to get approved for additional financing.
The same can be true for a fitness franchise or gym owner. They may want to purchase new equipment or staff up their current location for seasonal spikes (i.e., after New Year’s and during the summer). By recasting their fitness center business loan, they reduce their monthly payments so that they have the cash flow to hire more employees and upgrade their facility.
Recasting a loan is a way to free up cash flow by reducing payments, and it helps to lower your debts owed. This gives you more money to invest back into your business and makes you more “creditworthy” if you plan on applying for more financing.
National Funding does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.
