You’ve probably heard about how your peers may have saved money by refinancing their loans, so you’d like to try it. Before you dive into refinancing, it makes sense to understand what it is and how it will benefit you. Just like other financial products out there, refinancing may not be suitable for your personal circumstances.
This post will walk you through the ins and outs and refinancing, including what you should look for and its pros and cons.
But first, what does it mean to refinance your loan?
In simple terms, loan refinancing is when you take out a new loan so you can pay off your current loan. However, you cannot just pick any loan product from the same or different lender. In order to refinance your loan, you should be savvy as you look for a loan with a lower interest rate or at least reduce the total repayment amount.
If you struggle to pay off your loan, refinancing may be for you, especially if you need an extension. Longer terms with lower monthly payments sound like a steal. However, you should also be aware that you will end up paying more since the interest keeps adding up over time.
It seems confusing, but comparing the pros and cons will help you determine if refinancing is for you. If you came across our refinancing offer here at Loans Unlimited, you probably want to send your application right away. Like all finance products, it pays to research the benefits, as well as the possible risks.
Refinancing has pros and cons, and the final choice will always depend on your case. Let’s take a look:
Refinancing Can Help Reduce Your Interest Rate.
Perhaps the biggest reason why borrowers take out a new loan is to lower their current interest rate. By paying off the existing loan, you can focus on the new loan at a much lower rate. Refinancing offers are most suitable for people with good credit. If you have bad credit, you may want to improve your credit score first to receive better offers.
With a good to excellent credit score, you may be able to qualify for a lower interest rate, so you can pay off your loan faster or at least on time. You will not be burdened by the hefty monthly payments like your previous loan.
Refinancing Lowers Your Monthly Payments.
You could suddenly face an unexpected occurrence, such as getting sick and paying for medical bills. Pregnancy and giving birth or even natural disasters typically require you to reduce your expenses so you can get by these financial challenges.
Refinancing can help extend the life of your loan, which means that your monthly payments will become more affordable for you. For example, your current loan may still have two years left. Through refinancing, you can get one more year to extend the term. You will likely pay less each month, although it will still depend on your interest rate. Also, you will have to pay for the loan for one more year. The benefit here is that you can free up some cash each month, which may be enough to get you through a rough patch.
Refinancing May Be Ideal for Improving Your Cash Flow.
If you have paid enough for your car or personal loan, you can get more cash through refinancing. Let’s say that you have a car loan, which you have been paying for a few years now. Your car today is worth $18,000, and the loan still requires you to pay $9,000. Refinancing gives you $10,000, which means you have $1,000 extra cash, which you can spend on something meaningful, such as a home improvement project.
It’s Quite Complicated
If you have a car loan, you should be aware that you have a depreciating asset, which means that the value decreases over time. It’s crucial that you know what you are getting into so you avoid going underwater in a car where the vehicle is worth less than the loan.
Extended Terms Mean Paying More Over the Entire Duration of the Loan.
The right refinancing offer for you allows you to enjoy a lower interest rate. However, it does not mean you will truly save money. In fact, you will typically pay more the longer the extension is. Use our loan calculator so you know if you can afford the monthly repayments. Check if the interest and all the fees will help you reach your money-saving goals.
You’re probably looking to lower your monthly rate, which means refinancing is indeed a good option for you. However, if you want to pay less overall, do the math and only extend if you really need to.
How Does Refinancing Work?
Refinancing is actually not that difficult to understand. You can choose to refinance your car or personal loan with another provider. In this situation, you will devote the money you receive from the new lender to pay off the balance of your old loan.
Upon doing so, you enter a new contract with this lender, which essentially transfers your responsibilities from the previous one. However, not all lenders will allow you to refinance or pay off your car loan early. You could be charged with a significant early repayment fee and possibly other charges, as well.
Steps for Refinancing Your Personal or Car Loan
Refinancing is an excellent way to consolidate your debts, especially if you have more than one active loan. It becomes easier to manage your monthly payments, so you never miss them. When you are ready to start, here are the steps you need to take:
Pick the right refinancing product and lender for you.
Not all lenders allow loan refinancing. If you have discovered a better deal from your current lender, you can request more information and enquire if it’s possible to refinance your loan with it. You usually have the upper hand if you have been with the lender for some time. Having a good credit record also increases your chances of getting approved for refinancing. Spending time researching your options will help you find the right refinancing product and lender that fit your situation.
The costs are different, including the interest rate. Be sure to calculate the fees of the new loan and compare them with the current rates. It’s also a good idea to list your existing debts and see if the new loan will help make it easier for you, financially-wise.
Determine how much you need and how much you can borrow.
As stated above, you should calculate your debts to learn the ideal amount for you to borrow. Refinancing works just like your other car or personal loans. However, it is not wise to try getting access to a huge sum of money. The whole concept of refinancing loans is to lower your monthly payments or better deal with a lower interest rate.
Provide the reason for refinancing your loan when you apply. If you have a good credit history, you will most likely receive a good offer for the exact amount you need, plus an attractive interest rate.
Gather the documents.
Refinancing generally has the same requirements as other loans. If you have an existing car loan, you will most likely have to provide the following:
- Your Vehicle Identification Number (VIN)
- Car mileage
- The location where the vehicle was registered
- Your lender’s name and contact details
- Loan number and other relevant information
Speed up the process by ensuring that you have all the documents ready before you apply. It also helps if you have already talked to your current lender to close your contract with them with full payment.
Send your application.
Fill out the refinancing application and provide the required documents. Once approved, you will be contacted by the lender, along with the information about the new loan, including its interest rate and other fees.
Refinancing your loan should not be used as an excuse to build up on your personal debts. Use the cash you receive to get your financial situation in order. Refinancing is often an excellent strategy for people aiming to reduce their monthly payments after an unexpected expense so that they can get back on their feet quickly. If you want to refinance your car or personal loan, contact Loans Unlimited today.