Have you heard about the concept of refinancing, and you’d like to learn more about it? Perhaps, you currently have a debt you are repaying, and someone suggested refinancing it to you. Regardless of the reason for wanting to learn more about this topic, we’ve got you.
In this article, we will discuss everything you need to know whether this process is the right choice for you or not. However, because you may be new to all this, we will start by explaining what it means to refinance in the first place. Trust us, this article will be an educative and insightful read. At the end of it, you should have more than a basic understanding of this topic; so, stick with us to the end.
Meaning of Refinancing
Refinancing is a financial term that is used to describe the process of taking a new loan to pay off an older one. When you refinance a personal (consumer) loan, it simply means that you will take another loan either from a new lender or your current lender and use the funds you get to pay off your current debt. When you do this, you will then start paying off the new loan.
This may seem redundant to someone who does not understand the reasons behind this process; but trust us, it is not at all. When you refinance a debt, you will likely get a better deal on the new loan, and it can help you get debt-free a lot faster. Apart from this, you can use this process to borrow more funds for a new financial need. There are so many reasons people go through this process as you’ll get to find out in the next section of this article.
Reasons People Refinance
The reasons people tend to go through the process often vary from one individual to the other. However, some of the common reasons include reducing monthly payments, paying off debts faster, and lower interest rates. All these are the many benefits of this process; let’s take a closer look at them below.
Lower Interest Rate
Interest rates on loans tend to change depending on various factors in the market. If the rate reduces than what it was when you originally got your loan, you can use this process to reduce your interest rate. It can also work this way if your credit score becomes better than it was.
Faster Debt Payoff
If you do not mind paying more money on your monthly payments, then you can use this process to become debt-free faster. In this case, the new loan’s repayment terms will be shorter than the former. Doing this will also help you save money as the overall interest charge will significantly reduce.
Monthly Payment Stability
If you refinance and switch your interest type to a fixed one, you’ll get a stable monthly payment. This stability will make it easier for you to make plans for your payments. Some people go through this process for this single reason they find it difficult to make plans with how variable rates fluctuate.
Reduce Monthly Payment
For some people, the reason they opt for this process is to make their monthly payments more manageable. Refinancing can help you reduce your monthly payment if you are finding it difficult to keep up. However, it will also make the repayment period longer.
Should You Refinance Your Loan?
The main purpose you want to achieve by going through this process is saving money. There are certain financial situations that you will be in that will make this possible, while in other situations, you may just end up putting yourself in a worse financial position. Therefore, we will now discuss the best times and the worst times to go through this process to help you make an informed decision.
When Can You Refinance Your Loan?
Refinancing should be done only when it can help you financially. It could be to reduce your interest rate or your monthly payment. Whatever the case is, it should help you in one financial way or the other. The following are some of the times when going through this process is the right choice.
Your Credit Score Is Better
Typically, the interest rate you get on loans is determined by different factors including your credit score. Sadly, if your credit score is poor, you may not get the best deals when it comes to interest rates. However, having a good score can help you get a lower rate.
Therefore, if your credit score has become better since you took the loan, you can refinance it in this case. With the improved score, you can get a better rate. This would help you save money while reducing your financial obligations.
You Can Switch Rate Type
There are two major types of interest rates: variable and fixed rates. With a variable rate, your interest rates may increase or decrease periodically based on certain indexes and benchmarks. A fixed rate on the other hand stays the same throughout the loan’s lifetime.
Having a variable rate can be financially frustrating as you’ll have a hard time planning for the monthly payment. Though it’s possible that at the time of getting your current loan, that’s all you could get. However, if you can now switch rate types, then it will be a good time to refinance. With a fixed rate, you will enjoy a stable payment plan that you can conveniently work with.
You Need to Reduce Your Monthly Payments
You will want to cut down on certain expenses if you fall into a situation where you can no longer fulfill your monthly obligations. In a case like this, you can refinance your debt to reduce your monthly payment. You can do this by getting a longer payment period with the new loan. While this may not necessarily help you save money and will make you stay in debt for longer, it will reduce the financial strain on you.
You Can Pay the Fees
Sometimes, refinancing comes with certain fees. There’s the application or origination fee, and in some cases, the lender may ask for a prepayment charge. This is a fee that borrowers are sometimes required to pay if they want to pay off their debt before the end of the repayment time.
Before you decide to refinance, make sure you know all the fees that you will be required to pay. Then, take your time to evaluate your financial situation to know if this process is one you can afford or not. If you cannot afford it, then it would be better you avoid getting into it.
You Want to Pay Off Your Loan Faster
If you start earning more money, you may likely want to become debt-free faster. In this case, you can refinance your debt and get a shorter repayment term. Your monthly payment will increase but this can also help you save money in the long run.
When Refinancing Isn’t the Best Choice
Refinancing has a lot of benefits, but there are situations where it isn’t the best choice. One such situation is if the balance of your current debt is minimal. In this case, going through this process will just result in unnecessary expenses.
The reason for this is that during this process, you’ll have to pay certain fees. You can visit https://besterefinansiering.no to learn more about the process involved in refinancing a loan. If your current balance is low, you’ll be better off just paying it off rather than going through this process just to spend more money on fees.
Another time going through this process will be redundant is when your repayment period for the current debt is almost due. Refinancing in this case will likely increase the duration of the loan. It will also end up increasing the interest charges.
Finally, this process is not the right choice if the new loan you’d be getting will come with a higher interest rate. The only time this will be okay is if you cannot afford your monthly payment. This will allow you to prolong the loan’s repayment and reduce your monthly payments.
Refinancing a loan can be one of the best financial decisions you can make. However, this is only true when it is done at the right time. If you go through this process without being sure of the timing, not only will you not enjoy its benefits, but you may also end up spending more money than you originally would have. Thus, before you decide to refinance any debt, take your time to go through this article and decide if it will be the right choice.