Debt is difficult to manage. That isn’t a controversial statement, or anything – it’s just a fact. For a lot of adults across the world, each year they’re struggling to make ends meet because of all the bills that they have stacking up. Naturally, this can lead to some sticky situations.
If you’re already living from paycheck to paycheck, any change in a standing credit agreement that results in you needing to pay more each month can be nigh disastrous. Unfortunately, depending on the original contract that you sign with your lender, this is a very real possibility.
There are a lot of reasons as to why someone would want to alter their initial contract, though, beyond the one listed above. Surprisingly enough, it’s a very common plight. How can we go about making these changes, though?
Well, the main method is through something known as refinancing. For anyone not familiar with the phrase at all, you might find this resource valuable: https://www.investopedia.com/mortgage/refinance/9-things-to-know-before-you-refinance-mortgage/. Most of the time, we hear about it in the context of mortgages.
Why is that? Well, more often than not, it’s reserved for loans that have a larger principal amount. Mortgages and auto loans are two primary candidates there. These days, though, this is no longer a hard and fast rule. Many more types of loans are eligible for it.
One: What is Refinancing?
Another common way that people refer to this is as “refi,” if you’ve ever heard that before. Basically, refinancing is the process of adjusting the terms of a current loan or credit agreement that you have into something more favorable for you as a borrower. There’s a few ways to go about it, of course, but that is the gist of what it is.
Two: Why Refinance?
To properly understand it as a concept, it’s not a bad idea to get an idea of why people decide to refinance in the first place. The primary reason is to change the interest rates that they’re being charged. It’s a point of contention for a lot of folks as they look back on their initial agreements. Why is that, though?
Well, it’s not exactly a secret that interest rates change over time. As the state of the economy shifts, so too do the rates that lenders charge us to borrow. Most loans have what’s known as a “set” interest rate, though, meaning that the rate won’t change over time despite the national ones shifting. Depending on the circumstances, this can either be really good or really bad for the borrower.
If they took out their initial credit agreement during a time where the rates were high, but they’ve since gotten much lower, then that’s not a great thing. However, when the inverse is true, it’s quite nice. Most folks who get a “set” interest rate know the risks that are associated when they first agree to it. That being said, it is nice to know that we’ve got a backup of sorts should the former situation happen.
Three: Think about who your Lender Will be
Picking a lender for your refinancing loan is a pretty big deal because of the role that they’ll be playing. Some folks opt to stay with the one they’ve already got, and they simply take out a new loan with said lender with the new terms. However, not all lenders will be willing to negotiate with their borrowers, so it may be time to look elsewhere.
If that’s the case, and you are going to søke refinansiering, it may be time to shop around for a different financial institution to handle this new credit agreement. Because it involves taking out a new loan to get yourself a better deal overall, this can take some time. However, it will be well worth the wait at the end of the day.
Four: It’s Important to Compare Rates
In a similar vein to the above point, as you consider what lender that you’re going to work with for your refinancing credit agreement, you should compare the pros and cons of each. No matter what the purpose of your refinance is, this is pretty important. After all, each lender tends to have a different system in place for how they calculate their interest as well as their monthly payments.
Because some people decide to do this in order to reduce their monthly payments, it may be something that you have to contact the potential creditors about to consult with them on their offerings. You can also get the help of a financial advisor for this if you’re not confident or unsure as to what you need to be looking at.
Five: Think about Pre-Payment Penalties
Before you decide to go through with any sort of refinancing, you’ll want to go back and look at your original contract. In particular, check and see if there is anything in there about a penalty or fee if you decide to pay off the loan earlier than the intended length. If so, check and see how much that will be.
You see, if it’s very expensive, you may not actually be saving yourself any money by going through this process. The next time that you’re going for any sort of credit agreement, inquire about this and whether or not the lender requires a pre-payment penalty clause. They can be a real issue if you opt to refinance, after all.
Six: Try Not to Refinance Too Often
To some extent, this plays into the above point. You definitely shouldn’t be refinancing super often if there are pre-payment fees, since it involves paying off your previous loan with the new one. Generally speaking, though, it’s not a great idea to do this super often. If you do, it can end up negatively impacting your credit score to some extent because of the constant back and forth.
After all, doing this does cost you money. There are fees involved with taking out new loans, and there’s the other charges to keep in mind. So, just be careful to take that into account before you go out and do this for every single credit agreement that you have. You can read more about that in this blog.
Seven: It’s Not Just for Mortgages Anymore
As was briefly mentioned above, thankfully we aren’t limited to only refinancing mortgages and auto loans anymore. Now, we can do it for pretty much any type of loan. That includes personal or consumer ones, which is a pretty big selling point for a lot of people. Because a lot of us are in debt thanks to a personal loan, being able to change the interest rate or monthly payment amount is quite helpful.
Eight: It Can Change the Length of Your Loan
As far as the “fine print” goes for refinancing, this is one of the biggest things to be cautious of. While you negotiate the new terms with your creditor, be sure to pay attention to how long the new credit agreement is meant to last. Depending on the circumstances, you may end up with a few more years tacked on at the end. Worst case, it’s reset entirely.
This is typically what happens when someone decides to get a lower interest rate or change their monthly payment to make it lower. That’s because the lender still wants to make the same level of profit as before. It’s not always a bad thing, of course, just something that you should be aware of before diving in.
Nine: Budget Early and Often
To prepare for a big undertaking like this, you should prepare beforehand by examining your current monthly budget. Figure out how much more wiggle room you’ll end up with if your application for this is approved, and that way, you’ll be able to figure out whether or not it will truly benefit you.
Ten: Make Sure the New Terms Will be a Positive for You
For our final note today, let’s touch upon perhaps the most important rule to consider when you’re looking to go about the process of refinancing. If it’s not going to be beneficial for you, then most likely, it’s not worth your time and money. Double check before you make any commitment and ensure that you’ll be paying less each month.
Again, this sort of plays into the previous point, right? If you don’t know your current monthly budget and what your new one would be based upon a successful application for refinancing, then it can be hard to get a feel for whether or not it’ll be a net positive for you overall.
While math isn’t always fun, it’ll be worth crunching some numbers here before you end up agreeing to a deal that isn’t good for you. Always be cautious and read over the new contract closely. That way, you hopefully won’t end up with any nasty surprises down the line that you have to contend with, like more monthly payments when you thought the period was over.