There are times when one will have debts that they find very difficult to offset. Such circumstances may demand that one explores alternative solutions and one of such is seeking for debt refinancing. Debt refinancing refers to a situation whereby an existing debt is replaced with another debt that has more favorable terms and conditions.
Debt refinancing is used when an individual or company finds a loan that offers more convenient terms and conditions that they can use to clear their existing debt. When you are looking to refinance your debt, it is important to use a lender that offers the best interest rates as well as terms and conditions that suit your needs. If you need recommendations on reputable Norwegian lenders, you can visit: refinansiere.net to learn more about them.
In this article, we will outline some important points to note before refinancing a debt. Please read on as we explain more.
Steps on How to Refinance a Debt
The following are some steps to refinance your loan:
Check Credit Score
Before you think of alternative options to offset your existing loan, check your credit score to know if you are eligible. You can contact your credit card facility or bank to help you check your score. Generally, lenders approve a credit score from 660 for personal loans. However, a score of 580 and 600 can also be considered. But when you have a higher score, you will be entitled to lower interest rates and more convenient repayment tenure. Additionally, if you need tips on how to improve your credit score, you can check here.
Shop for Favorable Terms
If your score is sufficient, the next step will be to find online and traditional lenders that render refinancing of loans. You can commence with reaching out to your current provider to see if it is possible for your loan to be refinanced by them. If they are willing to do so, they will give you details of your outstanding payment so that you will know the additional amount needed. Once you get this information, you can contact online lenders and local banks to compare their loan terms.
Once you have selected a lender to work with, you will compile the necessary information as well as the documentation needed to complete the application. This includes pay stubs and copies of tax returns. However, these requirements may vary according to the lender you are using. When the loan application is completed, approval should happen within a few weeks except there are other underlying issues withholding it.
Offset the Original Loan
When you receive funds for the new loan, you are required to use it to pay off your original loan. Based on the agreement of the original debt, you may be required to take on a prepayment penalty. The final step will now be to await confirmation that your account has been formally closed to avoid additional penalties and fees.
Commence Payment on the New Loan
When you have cleared the original loan, it is important to commence regular payments to clear the new loan. You can sign up for your bank to automatically debit your account with the required amount monthly. If you repay in good time, it will help in improving your credit score on the long run.
Reasons for Refinancing a Debt
The following are some reasons why individuals refinance loans:
Most people are always on the lookout for loans with better interest rates. The discovery of a lender that offers loans with favorable terms can lead to one opting for refinancing of loans. When their application pulls through, they clear their existing loan while maintaining the current one.
Reduction of Monthly Repayment
Sometimes, when people seek for refinancing of debts, they have the intention of reducing their monthly repayment plan with the existing debt to make room for a new loan that has longer terms. The essence of this is to have a repayment plan that is convenient to the debtor and also spans into a long period of time. The advantage here is, the longer the repayment period, the more convenient it is for the debtor to repay.
Most people go for refinancing of loans because they want to change from a fixed-rate loan to a variable-rate loan or vice versa. The change in interest rates can encourage or deter debtors especially when they learn of new offers that come with flexible terms.
Challenges of Refinancing an Existing Debt
Refinancing a loan isn’t always as it seems as it comes with some limitations and we have outlined some of them below:
Although some borrowers may consider loan refinancing as a veritable option, the feasibility in some cases is in doubt. This is because there is a penalty payment the borrower will incur if they refinance the debt and this can be on the high side, in addition to its non-inclusion in the main debt. These penalty payments can also take the form of opening and closing fees.
Non-Approval of Application
The application process can be long and there is no guarantee that it will be approved even after making payment for the opening fees. Most people do not explore this option because they feel it may take their time with little or no guarantee for a change in loan condition.
Incurs more Debt
Although the aim of refinancing a loan is to reduce debt, the reality is that more debts are incurred and this can be a pretty bad situation if not handled properly. Most people take loans because they feel the interest rate and repayment tenure is favorable to them. Picking up another to offset the existing one isn’t a good sign of credit worthiness and can affect one’s credit record in the long run.
Refinancing a loan can be a viable alternative to offsetting an existing debt. However, before you take that decision, there are some important points to note and we have outlined them in this article. Feel free to check them out.