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Paying off debts can turn into a real hustle if you don’t watch out. When you first get a loan, it’s all well and good: you finally have the money to achieve your goals. But that’s only half of it. You might discover further along the road that you can’t repay in due time. This is a reality for many borrowers. Expenses have accrued, you spend more than you thought you would, and all of a sudden, you have no idea what to do.
Banks have already done the thinking for you. After all, it’s absurd not to give more options to defaulters to make amends.This practice has been around for quite some time, and it helps people pay off debt with a new one.
At first glance, this sounds like something that would create even more trouble. Something that would later become a never-ending downward spiral of debt. But in reality, it’s an underestimated tool that people should know more about.
Though refinancing is a new concept for many, it’s nothing you can’t grasp quickly. We’ll talk about the basics, and what to do when push comes to shove.
Refinancing in a Nutshell
As we said, refinancing means replacing old loans with new ones. Or, in other words, paying off the debt of the initial loan by taking a new loan. You’re probably wondering if this is smart and what’s its purpose. The main goal is to get better terms and conditions on your new loan; otherwise, the whole process would be pointless.
It doesn’t matter what you borrowed for in the first place. It could be a car loan or a home loan – debt is debt. The only important thing is repayment: refinancing is just one way of doing it. Now, you might refinance because you misjudged the original loan.
Maybe it turned out to be too expensive. Or, your lender could be currently offering better conditions for new loans. Bottom line: if you have the opportunity to use more favorable circumstances, refinancing is the way to go.
A word of caution to this tale: your collaterals are still in jeopardy if you refinance a secured loan with an unsecured one. Here’s what that means: first, you applied for a car loan but later decided to refinance it. Even though the new deal doesn’t include the car, the bank could still seize it. Old loans carry their risks with them, something you should always be aware of.
Also, when applying for refinancing, you should give all the relevant details to the lender. They need to know your case inside out to determine if it’s right for you. In some cases, people are convinced they need it when actually they are just looking for trouble.
How it Works
Someone with zero experience in finance would probably scratch their head at this. Do you keep repaying the old loan? Do you start repaying both? Is it even legal to replace debt in this way? And myriad other questions. Well, it’s a very straightforward concept once you get it.
As we said, the chief reason for refinancing is to get better terms for your loan. It’s your right to improve your finances, and there’s no reason anyone would stop you. The new loan might come from the same lender, or you could seek more favorable offers elsewhere. As with any other application, the ideal approach is to consider more offers until you find what suits you most.
When you apply for your new loan, once they approve it and you finish the closing process, the old one is cleared. Having said that, if you haven’t repaid old closing costs, the lender can attach them to the refinancing loan, creating new debt.
This is definitely something to avoid. Make sure you have fulfilled the old obligations before taking on new ones. With these operations, it’s always good to get expert advice if you don’t feel comfortable with numbers.
Meeting the Criteria
The application process for a refinancing loan is the same as any other. The only different thing is the purpose. Whatever criteria you met the first time around will also apply in this new situation. The ideal way would be to refinance with your old lender, who is already familiar with your case, but if someone else is offering better terms, don’t think twice.
Sometimes people apply for refinancing when it’s not necessary. Or because someone talked them into it. Refinancing has to be logical; there needs to be an improvement of some kind. So before you make a move, be sure to check your current interest rate. If it’s very close to the new loan rate, then you shouldn’t bother. Refinancing only makes sense if you’re new loan is more advantageous.
Calculating all these costs by yourself is a drag. There’s a specialized tool for this purpose called a refinance calculator, available on websites like https://refinansieringkalkulator.net/, which will help you make the right choice. It considers all aspects so that you will know exactly where you’re at financially. It’s easy for a person to overlook some hidden fee that seems insignificant, but the calculator will make sure all details are there.
Some Extra Info
Since we mentioned fees, you should know that refinancing involves a few extra expenses. Knowing them beforehand will make the whole thing easier. These are usually very small percentages of the loan, so let’s check them out.
Your new loan might include an underwriting fee of 1% of the whole amount. Also, it almost certainly has an origination fee, roughly between 2% and 5%. Then you have the prepayment penalty on the initial loan (2% and above). It could also carry appraisal fees, an SBA guarantee fee, and some others.
Considering all the information at your disposal, there’s simply no excuse for being uninformed. Communicating with different lenders will give you a complete picture and more options. Finally, refinancing is already a well-developed routine in most institutions, so there shouldn’t be any trouble when you apply.
