Do you know you can refinance just about any debt, other than a mortgage? Yes, you can refinance all debt – whether its student loans, personal loans, auto loans, title loans, or credit cards. If your existing loan structure is expensive or you struggle to make payments, then debt refinancing will help you improve your loan terms.
There are several ways you can quickly achieve this, but first, let’s learn what loan refinancing means.
What Is Refinancing
Debt refinancing means replacing an existing loan with a new loan. Loan refinancing entails trading one debt for another. You are merely moving your debts from one lender to another with better terms.
You can also refinance all debts with the same lender. In this case, you change the current loan terms to one that is more suitable.
The Process of Refinancing
When you refinance, the money from the new loan is used to pay off the previous loan. So you start making repayments to the new lender.
A Typical debt refinancing process will involve:
- Having an existing loan you want to improve its terms.
- Getting a new loan from your lender or another lender at better terms
- The funds from the new loan will pay off your previous loan
- You start to make payments on the new loan
BENEFITS OF REFINANCING DEBT
There are various reasons you may want to refinance your existing loan including
Refinance to Save Money on Interest
If you have a loan, title loan, or credit card debt with high rates, you can refinance to save money on interest payments. When refinancing, you need to switch into a loan with lower rates than your existing loan. The difference in interest rate can result in massive savings over time.
Refinance to Get Lower Monthly Payments
Refinancing a loan can lead to a reduction in your monthly payments. Since your balance for the new loan would be smaller than that of the original loan, you would have less to pay, resulting in a reduction of the monthly payment.
Refinancing would improve cash inflow by freeing up cash for other expenses every month.
Refinance to Shorten Your Loan Term
Refinancing enables you to change the term of the loan. For instance, if you have a 30-year loan plan, you can refinance to a new loan with a lower lifespan of 15 years.
This change may, however, result in higher monthly payments, but it will come with low-interest rates.
Refinance to Consolidate Debt
Debt refinancing allows you to combine multiple loans into a single loan for easy repayment and monitoring. You can refinance all debt from different lenders to a single lender.
This process can save you money by reducing your interest rate, and also save you the time of managing multiple loans. Consolidation, however, may cost you more money by lengthening your repayment period.
Refinance to Switch to Another Loan Type
Refinancing allows you to change to a different loan type. For instance, if you currently have a variable rate or adjustable-rate loan, then you can refinance to switch to fixed rates. Interest rates of variable loans are flexible and can change periodically. Fixed-rate loans, however, have “fixed” interest rates.
REASONS NOT TO REFINANCE A LOAN
Refinancing Can Cost You More: There are times when refinancing doesn’t seem right. The upfront costs of the new loan may outweigh the benefits you may enjoy.
Higher Interest Rates: You may end up paying more in interest when you refinance. Even if you are paying lower interest, it may add up quickly to be higher than that of the previous loan if the lifetime of the loan is longer.
You may also end up with slightly higher rates if your credit history has declined since your last loan.
High Transaction Cost: There are so many costs involved in debt refinancing like processing fees, origination fees, etc., and you will have to pay for them either in fees or interest.
It’s essential to consider these factors before making your refinancing decision. Look up the difference in interest rates and payments and see if refinancing is still a good move.
WHAT TO CONSIDER BEFORE REFINANCING A LOAN
Just like most endeavor, refinancing has its pros and cons. Hence it’s essential to think it through before making a decision. Here are some factors you may consider before refinancing a loan.
Determine Your Goal for Refinancing
You need first to determine your reason for refinancing. Is it to reduce the interest rate, change the loan type or duration? Establishing your reason for refinancing will make the process easier and help you identify the best way to refinance debt.
How Long You Have Been Paying the Loan
At the beginning of debt repayment, the bulk of the payments are usually used to service the interest. So the more you pay for a loan, the more significant the amount applied to the principal.
This changes when you refinance. The bulk of the repayment will once again apply to interest payment.
What Are the Fees and Costs?
You need to consider the cost of the new loan. Inquire of all the associated costs and compare the total with the amount you will save by refinancing.
REFINANCING VARIOUS LOAN TYPES
Refinancing a Mortgage
Refinancing a mortgage is an excellent way to make it faster and easier to pay off your debt. You can lower your interest rate by half resulting in lower repayments. You can also change the period of the mortgage as well as the interest type.
To refinance, you need to get a new mortgage with suitable conditions to pay off the old mortgage.
Refinancing a Student Loan
Refinancing a student loan can save you up to 4% in interest payments. If you have a parent PLUS loan, you can refinance to remove your parents as cosigners or get lower rates.
Your chances of being approved for student debt refinancing are higher if you have been paying your bills on time.
Refinancing a Title Loan
If your title loan is at a high interest rate, you can seek out different lenders to refinance. You’ll need your current loan paperwork to begin the process. Refinancing a title loan can get you lower payments and save you money.
Your credit won’t be an issue, but the lender will consider the value of your vehicle and your income.
Refinancing a Car Loan
An auto loan can also be refinanced to lower rates if you have a good credit score. Besides traditional lenders, credit unions, are the best way to refinance debt.
Just like with mortgages, the funds from the new loan pays off your existing loan.
Refinancing a Credit Card
You can quickly refinance a credit card with high-interest rates. To do this, you would need to get a new credit card with lower rates and transfer the balance of the previous card to the new one. You will, however, need to have an excellent credit history to get better rates.
Debt refinancing is a great way to improve the conditions of your loan repayments. Though you can quickly refinance all debts; there are times when refinancing can be a bad idea.
Hopefully, this article will enable you to identify the best way to refinance debt.