The cost of living has been climbing steadily in most parts of the world. It’s no wonder that most people find it hard to settle their expenses and still have enough cash left to survive. With conditions like this, it is perfectly natural for an individual to seek financial help in the form of a loan.- About Loan Refinancing
But what happens when they find themselves unable to repay their loan, or dissatisfied with the terms agreed upon? You can’t simply abandon a loan because you dislike the interest rates. An agreement is an agreement and unless you want to go against the law, your best alternative is to refinance the loan. While most people don’t enjoy taking out loans, taking out loans from shady lenders makes the entire process even more complicated. Visit https://www.refinansiere.net/ to learn more about credible loan providers.
What is Refinancing?
When we talk about refinancing, it has to do with taking out a new loan with better terms to pay off a previous loan. There are several reasons why people refinance a loan, including getting better interest rates and terms. Below we will look at some advantages and disadvantages of refinancing.
Pros of Refinancing a Loan
You Might Get a Better Rate
Earlier on, we mentioned that people sometimes take out a new loan so that they don’t default on the old one. While this is true, in most cases loans are refinanced because of unfavourable interest rates. Interest rates are always changing, sometimes it goes high, and other times it drops.
When someone takes out an advance, it is often because it’s an emergency and they can’t afford to wait. Once the loan has been taken out, you can refinance it when interest rates are lower, this is a good way to save money long-term.
It Can Help Reduce the Amount You Spend on Monthly Payments
It is common knowledge that a loan with a short term often means higher monthly payments. Depending on the type of challenge you have, a lower monthly payment might be what you need. This is where refinancing a loan comes in handy.
If you refinance into a loan with a longer payout term, your monthly payment will be drastically reduced. However, we must mention that longer loan terms often mean more interest paid in the long run. Keep this in mind as you make your decision.
Reduce the Loan Term
There are situations where a change in the borrower’s finances prompts them to seek a reduced payment term. Let’s say their original loan was supposed to be paid in 24 months and they suddenly find themselves able to repay it in 12 months, by taking out another loan to repay the previous one, they will be able to escape debt much sooner.
Potential Cons of Refinancing
Beware of Extra Costs
Sure, refinancing could reduce your future costs if it’s done right. But you might not feel the same way if you factor in the extra costs. Let’s look at the origination fee, this is charged to you so the loaner can cover costs such as loan application and fund payout.
Other times your loaner might ask you to pay a pre-payment fee. This might be confusing, after all, don’t they want you to pay up early? You see, loaners make a profit from the interest charged on the borrowed money. When you repay a loan earlier than the time period previously agreed on, the interest that would have been collected upon completion changes.
Moreover, prepayment penalties only come into play when a loan is paid off early. Click here to learn more about prepayment. You should note that different lenders have different policies, it is up to you to make your research.
Lower Interest Rate Might Not Mean More Money Saved
One mistake most people make is assuming lower interest rates means you’d save more money; one little detail is often forgotten. If a loan has a longer term, it means that interests would be paid for longer too.
We will try to make this clearer with the use of this example. Let’s assume you took out a personal loan of $20,000 with a 17% interest rate and a term of 36 months. Now, you are considering taking out a new loan that would run for 60 months, they even added a juicy 15% interest. That’s 2% interest less than your current loan but here’s how it will play out.
- Your 17% interest loan which lasts for 36 months will have you paying $12,240 at the end of the term.
- The 60-month loan which gave you a lower interest rate will have you paying $18,000 at the end of the term.
You can see that even though the second loan had a lower interest rate and even gave you more time to repay, you ended up paying more. No one is cheating you, that is just how the math works. The problem begins when you fail to make adequate research.
Things You Should Do When Refinancing a Loan
Compare Multiple Loan Providers
There are so many loan providers out there and this means that you have options when it comes to finding favourable terms and interest rates. With this in mind, it becomes crucial that you do not settle for the first lender you come across even if the deal is attractive. By deciding to look at other options, you stand a chance to get even better deals.
Examine the Reputation of the Lender
The internet has made it easier to access a company’s track record. Check different online communities and look for past customers that had dealings with that particular lender. Do not focus on positive reviews only, you also want to see what made some customers disgruntled.
Is the reason for their dissatisfaction vital? A good place to start your search is the Consumer Financial Bureau. They receive thousands of complaints concerning loans, and a lot of useful information can be gotten from here.
Ensure You Understand Their Fees
The fees encountered when refinancing a loan goes beyond your monthly interest payments. It is up to you to figure them out, from prepayment penalties to origination costs, and so on. When you consider these fees, the total cost of the loan might be more expensive than you expect.
Interest Rate and Term
The interest rate and term of the loan are very important to any borrower. Therefore, your decision to go with a loan provider should be in line with your desired goals. Do you have a lot going on and just want to reduce your monthly payment for more breathing room? Then you would need to focus on lower interest rates.
Is time an issue for you? Then your focus should be on the term of the loan.
Examine Your Credit Score
Getting a loan isn’t as easy as it used to be in previous years. The standards have been tightened with regard to the required credit score you need to qualify. It is important that you know your credit score and what it could get you.
A poor credit score might land you a loan. However, you may find that you’re charged a higher interest rate for this. Visit https://en.wikipedia.org/ to learn more about credit scores.
Types of Refinancing
This method is common when there is an asset of value involved, it could be a home or a car. It allows people to borrow money without losing out on the added value an asset might have. Let’s say the value of a house goes up, you can collect this difference in cash. The best part is that you don’t lose ownership of the asset through all this.
This option is used in situations where a new loan has been obtained with an interest rate lower than the existing loan. When this happens, the consumer pays off the current loan with the new one. The aim here is to save money by switching to a plan with a cheaper interest rate.
Using one loan to pay off another has been going on even before the invention of modern banking systems. In fact, you might have done it informally if you collect money from a friend to give another whose date of collection is closer.
There are many reasons why a person would want to refinance a loan. Whether it is because of lower interest rates, the need for longer loan terms, and so on, there is a refinancing option out there for you. Hopefully, with the information contained in this article, you’d be able to make a more informed decision if there’s ever a need for you to refinance a loan.