The Advantages of Loan Refinancing
By Space Coast Daily // November 20, 2019
Refinancing is one of the most effective ways of dealing with debt. Prior loans, which might have made good economic sense at the time of origination, often lack the advantages of a new contractual arrangement.
Why do people opt for this strategy? Simply put, to get lower rates, better terms, consolidation features, lower payments and more. Here is the least you should know if you are considering trading an old loan for a new one.
What is Refinancing?
When borrowers renegotiate the terms of a contract, they’re simply arranging to pay off an existing debt with the proceeds from a new one.
In most every case, consumers do this in order to save money or pay off an old balloon note that has come due. For homeowners, there can be all sorts of related reasons to go this route.
For adults who have a large amount of education debt, refinancing student loans can offer breathing room and generally better terms, like more time to pay, lower rates and lower monthly payments.
Consolidation and Types of Debt
Two other key ways that refinancing can be advantageous include debt consolidation and switching from a variable to a fixed rate.
Many people view a consolidation as a smart way to put all their debt into one basket, often with a lower interest rate, a single monthly payment and more time to pay off the entire amount.
Lenders say that about 10 percent of all such agreements involve borrowers who want to swap out variable rate contracts for ones that carry a fixed rate. This move often doesn’t show any tangible savings but has the potential to protect borrowers from future rate increases.
Restructuring Student Debt
Those who renegotiate their agreements are probably the largest group of customers in this market niche. That’s not because these contracts offer the best deals but because there are so many young adults who have significant college-related debt.
For those who wish to renegotiate student debt, it’s important to shop around and compare terms from at least three lenders. Qualifications vary widely, both in terms of the minimum credit score you’ll need and other factors like the total amount of student debt you’re carrying.
But if you’re employed and have decent credit scores, you should be able to find a new package that meets your needs.
Know When to Act
Remember that once you refinance any kind of debt, the total amount you owe will essentially remain the same. And if the original deal required collateral, the new one will almost certainly attach the same items to the new contract. What will change are the terms.
If your credit score has recently improved, getting a fresh home mortgage or brand-new education loan can make a lot of sense. Not only will you get more time to pay but the new interest rate could be significantly lower. That means your total cost drops by an appreciable amount.
The decision to take this step, however, should only be made after doing a complete assessment of your current financial situation.