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Refinansiering Av Lan – What Are The Pros And Cons

As part of a wise financial solution, refinancing a consumer loan gives a borrower the potential to pay off debt and possibly save money given adequate circumstances. People tend to use refinancing as a tool to save money by transitioning high-interest debt into a lower-interest payment.

As a rule, the one primary purpose for initially obtaining consumer loans is transitioning higher interest debts into a lower interest bill. Getting an even lower rate on that consumer loan is the ultimate reason for refinansiering (refinancing) the existing product.

In order to make the right financial decision for your specific situation and for it to make sense, refinancing would need to, in some way, save money. Some variables play into whether replacing an already existing loan with a new one would be worth the time and expense.

That includes if there are fees attached to the process, like prepayment penalties for early payoff of the current loan and other potential charges. Let’s review refinancing as a financial solution.

What Is Refinancing of A Consumer Loan

Refinancing a consumer loan is the process of applying for a new consumer or personal loan that will ultimately replace the current product. In many cases, the lender you took the original loan with will help you refinance if they offer the option.

Not all providers do. In that case, you would need to shop lenders and apply for a new loan with a new lender.

Upon approval of the new loan, you will receive a different rate and terms from what you had originally. That will dictate the monthly repayment installment and the eventual overall cost of the loan at its close.

When you receive the funds, these will go toward the payoff for the existing loan. Sometimes there are disadvantages to paying off a consumer loan if there is a prepayment penalty with that lender and potentially negative consequences on your credit score.

That doesn’t necessarily mean the refinance is unwise. It will depend on your particular situation and financial circumstances. Find out what refinance is at https://www.investopedia.com/terms/r/refinance.asp and, then check out a few of the advantages many borrowers see with the solution.

  1. Lowered interest rate: Refinancing offers the potential for a reduced interest rate compared to the one you received with your original loan. That can happen if you make improvements with your personal profile and financial circumstances since initially applying. Or perhaps the rates have dropped considerably.

In either situation, the lower rate can save you considerable money on the life of the loan, depending on the rate and what you qualify for.

  • Lowered monthly repayments: If you choose to extend the term of the loan, the monthly payments will be reduced with the refinance, saving money with your monthly obligations. That means if you find yourself struggling while carrying a loan term of merely 24 months, you will see a significant improvement if you opt to extend that term to either 36 or even 48 months.

It’s important to remember, however, that when increasing the term, you will also be paying interest for a more extended period of time. While you’ll be saving considerably with each monthly repayment installment, the overall cost of the loan when it closes will have increased substantially.

  • Increase the monthly repayments: Seeing it from a different perspective, if you were to have a change in your financial situation to the point you can afford a higher monthly obligation, you could decrease the loan term instead of making it longer, switching from 36 months to 24 months where it would no longer be a struggle.

You could find that paying even a little more is possible, allowing the potential to pay the loan off faster and rid yourself of the debt much sooner. Because you’re decreasing the interest that you’ll pay overall on the life of the loan, the product then becomes less expensive as a whole.

Are There Disadvantages To Refinancing A Consumer Loan

The pros present a pretty good case for why someone would use refinancing as a solution when attempting to better their financial circumstances. That doesn’t mean there aren’t negatives as well.

It would help if you weighed the pros and any potential disadvantages of any step you take that might affect your household finances. Let’s look at a few of the downsides with refinance.

●     Potential fees and charges

Some consumer loans come with additional fees and charges, including prepayment penalties and origination fees. A loan that comes with both of these would involve paying a substantial amount to close the existing account, turning around, and paying another significant fee to start the new one.

Despite the possibility of the interest rate being much lower than the original product, an origination fee has the likelihood of a borrower needing to pay more money throughout the loan’s life.

The recommendation as someone shopping lenders for a refinance is to consider the penalties plus the fees and charges aside from the interest rate.

Interest as a percentage is the fee a borrower pays the lender to receive the funds. The Annual Percentage Rate or APR is the loan’s annual cost combining any added expenses plus the interest rate for the borrower.

How Can A Borrower Initiate A Refinance

After weighing the pros and cons of refinancing and finding your personal situation would benefit from the move, there are steps to follow to move forward. Check these out.

●     Shop lenders

The first step in this process is to reach out to the loan provider with whom you took the original loan to see if you can refinance with them. Not all providers refinance, making it necessary to essentially start from scratch.

In doing so, you want to keep in mind the fees and charges first and foremost before looking at the interest rate.

These can significantly impact whether you should make the move or consider waiting. With the interest rate, you’ll want to look for the lowest rate you can feasibly qualify for combined with a manageable monthly installment and desirable term.

●     Know your credit score

Before you can shop lenders, you need to become familiar with your credit profile, the score, where you stand with your history, plus your financial circumstances. The score in and of itself will be a deciding factor for most lenders on approval or denial, and from that point, they will rank your interest rate based on the higher your score.

If you know you’ve made improvements since the original loan, you should be able to shop confidently for competitive rates with favorable terms.

It’s worth checking out a loan calculator, which you can find online, to determine the possibility of extra costs based on prepayment penalties and origination fees and how these might impact your repayments.

These charges can potentially raise the price point of a product, so even a refinance offering a much lower interest rate could be more expensive in the long run than your original loan.

●     The application process after pre-qualifying

The recommendation is to shop with lenders who offer pre-qualification so you can get a general idea of where you’ll stand with the actual loan when all is said and done. It’s not clear cut, but it will give you a fundamental idea of the interest plus fees and charges, considering your profile.

Plus, there’s only a “soft credit pull,” so you can inquire with a few different lenders with minimal effect on your credit.

Once you decide to make a formal application, this is where the hard credit pull comes in. That means you want to be relatively sure of a couple of providers you want to apply with.

The process is not so different from the original, with the same criteria. Once approved and in receipt of the funds, these will go to the existing loan to close that debt.

Final Thought

Refinancing isn’t necessarily a cut-and-dry decision. It takes careful consideration of your credit and financial profile (first) and then looking at the products to see what fees and charges are associated with both closing out your existing account and opening the new one.

There will be occasions where there are no penalties or fees, and charges. But the impact of these, when they do exist, can be far-reaching in some instances, making or breaking the option of taking a new loan. When you refinance a loan, you should, in some way, save money. That’s ultimately the purpose of a refinance.

Jack henry
Jack henry
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