Loans in most cases are necessities we can’t do without. But what happens when you are unable to make repayment? One of the ways people deal with such a situation is to refinance the current loan.
What does refinancing mean you might wonder? No need to wonder because this article is designed to reveal all you need to know about this financial strategy. We’ll go into details to ensure you are well-informed.
What Does Refinancing of Loans Mean?
Simply defined, loan refinancing is the process of replacing your current loan with another loan that has better terms. In other words, you take a new loan strictly for the purpose of paying off your old loan. The outcome of such an endeavor is to get reduced interest rates, different repayment duration, or a better payment structure.
If you took a traditional consumer loan, your lender might have refinancing options that you can take advantage of. You can also approach a different lender to refinance your old debt. However, if you want to refinance product loans such as cars and mortgages, the interest rates of the refinance credit might be slightly higher than the normal purchase credit of these products.
Since the main reason for refinancing is to secure a better deal, getting another loan for mortgage or auto credit, is not advisable by most professionals. If you must refinance these products, ensure that the interest rates are not too high. Also, try to see if you can get other benefits such as allowing you to make a one-time repayment to reduce the overall loan cost.
When doing this confirm that there are no prepayment penalties attached. Some of these product loans tend to have this condition. Therefore, opting to make an early payment might end up being a disadvantage.
Consumer loans do not have such penalties, which makes them perfect for early prepayment. Since such loans allow you to pay a lower amount each month for a long period, it might seem to be a good bargain. However, the overall cost is higher and this is one reason many choose to refinance. You can pay off the loans faster and then reduce the overall cost.
Reasons Individuals Refinance Loans
As you might have picked up from our discussion so far, there are many reasons why folks refinance loans and why you should as well. If you didn’t pick up those reasons in the previous section, we’ll spell it out now. Here they are:
Reduced Interest Rates
Your lender might offer you a reduced interest rate for two reasons. The first reason is that since you took the initial credit, your credit score has improved. The second reason is that the market conditions have made interest rates more favorable. Any or both of these reasons might be responsible for your lender offering you reduced interest rates.
Since refinancing is all about getting better terms, taking up such offers is one way to refinance (also known as refi) your existing loan. With such an offer, you stand the chance to save a lot of money. Furthermore, given that it is offered by your current lender, the approval is guaranteed.
Shorter Loan Duration
Want to speed up repayment, then refinancing is a sure way to get the job done. All you need to do is settle for a shorter duration when taking the new credit. An added advantage to this is that you get to save money you would have spent on interest for a longer duration.
Affordable Payment Structure
Repaying a credit can be somewhat challenging. So, if you’re unable to meet with your repayment, refinancing can offer you a solution. You can seek a lower interest rate or an extended repayment duration.
Switch to Fixed Interest Rates
If the credit you took had variable interest rates, you can use refinancing to switch to fixed rates. With fixed rates, you don’t have to deal with fluctuating interest as affected by the market. This will ensure that you are certain of how much you need to pay monthly and plan effectively for it.
Advantages and Disadvantages of Loan Refinancing
In this section, we’ll list the advantages and disadvantages of refinancing a loan. This will ensure you know exactly what you’re getting into if you choose this financial strategy. Let’s begin with the advantages:
Advantages
- Opportunity to reduce how much you pay in a month
- You can switch to a credit with a fixed interest rate in place of variable rates
- If you choose to shorten your repayment duration, you’ll end up saving on the overall interest you need to pay
- Your lender or other lenders might offer you reduced interest rates provided you have a better credit score or the market rates have dropped
Disadvantages
- There is the possibility of paying a penalty for early repayment on some loans, and this could eat into the savings you would have gotten from refinancing
- The temporary decrease of your credit score when you apply for the new loan as a result of the credit inquiry that the new lender will carry out
- If you decide to get an extended repayment duration, you might end up spending more in the long run on interest even though you get to enjoy lower monthly payments
- The approval period for the new loan requires 30 to 45 days. It’s even longer if you’re refinancing a mortgage.
Process of Loan Refinancing
The details of applying for this loan might vary from lender to lender. However, the general process is usually similar. Below are the general steps you’ll have to follow:
- Examine the terms and agreement of your current loan to find out how much you are paying. Find out and be sure of the interest rate. You need to also know how much you pay monthly.
- The next step is to confirm that there is no penalty on the prepayment of your current credit. Such penalties are charged by some lenders to enable them to recover losses that might incur when a loan is paid earlier than the due date. If there is such a penalty, then refinancing might not be the best option to take. This is because the penalty fee usually outweighs the benefits you’d have enjoyed.
- At this point, it’s time to compare lenders. Visit https://besterefinansiering.no to compare the interest rates of some lenders in Norway. The whole point of this exercise is to determine which offer is beneficial for you. Take your time to compare their repayment terms, interest rates, and other fees to your current credit.
- Once you are satisfied with a particular lender, you can begin the application process. You might need to submit yourself to certain checks. You’ll also need to present certain documents. Bear in mind that it can take up to 30 to 45 days for the loan to get approved.
Loans You Can Refinance
You can refinance nearly all types of loans. However, in this section, we’ll focus on the ones that are commonly refinanced. Here they are:
Credit Cards
The interest rates on credit cards are among the highest you can encounter. If you’re neck-deep in this kind of debt, the refinance option might just be the solution you need. Replacing your credit card debt with a more manageable loan is a smart option you need to consider.
Personal Loans
Personal loans are the most common credit folks refinance. To get the best out of this, try to get a new credit with an intro APR (annual percentage rate) of 0%. While this might be scarce to find, getting a low APR should be your target.
Ensure that you take your time to compare the repayment terms, fees, and APRs of different lenders. It’s always best to go for lenders that don’t require origination fees as part of the administrative fees. However, if you can’t find such, ensure that the origination fees of the lender you settle for are not high.
Mortgages
The reasons folks refinance house loans are to reduce the repayment duration and to reduce the monthly repayment. For mortgage refinance, you need to bear in mind that there are closing costs attached to these deals. In most cases, these costs are usually high. Therefore, mortgage refinancing might not offer benefits in cases where the closing cost exceeds how much you can save.
Student Loans
This type of refinancing is used when you have multiple credits and you want to merge them into one account. Having multiple loans means you have to make separate payments and deal with different interest rates. However, when you refinance, you get to make only one payment monthly and then service a single interest rate.
Conclusion
Loan refinancing is a great way to cut down and even get out of debt especially multiple loans. While there are different reasons you need to refinance, you need to carefully research and determine if it’s the best step to take. In this article, we’ve provided a detailed guide on what you need to know about this finance strategy. The information we’ve shared will help you as you carry out your research to get the best refinance deal that suits your goals and current financial status.
