As many households take a long hard look at their finances to try and squeeze the most out of every dollar earned, refinancing loans may be considered as an option to free up some money.
However, whilst it is possible to get a new deal to lower outgoings, several other factors need to be taken into consideration rather than just checking out the cheapest rates on a loan repayment calculator.
If refinancing is being seriously considered as an option, one of the first steps should be to establish what is on the credit record. In the current economic climate, lenders are tough on anyone with blemishes on their files and will be reluctant to offer competitive interest rates.
The US government obliges credit bureaus to provide an annual free copy of an individual’s credit file upon request and this is a good place to start.
Ensuring that there are no inaccurate or misleading entries and that the credit file is in good shape is essential before applying to a lender. It is equally important to make sure that lenders have lodged good credit entries, as not having any credit can also make a new lender wary.
For those who have a few blips in their recent history, it is not the end of the world. However, it would be better to postpone any refinancing until a little more time has passed and concentrated on creating as many positive credit entries as possible to reduce the impact of past problems.
Assuming all is OK and refinancing is possible, it is essential to check how much closing down your existing loan will actually cost. Many lenders charge early repayment penalties and these are generally in the region of 2-10 percent of the total loan value, not an insignificant sum.
Especially for those refinancing to create more income, paying an extra lump sum to the finance company can seem like a choker and it can be tempting to add these to the new loan. However, if at all possible, this should be avoided as it will simply mean more borrowing to pay interest on.
Individuals considering refinancing loans may have any one of several priorities and it is important to be clear about what is most important before assessing options via a loan repayment calculator.
Some people may be looking to access some cash to pay for a large expense, such as a college fund or new auto. Another’s main priority may be lowering the monthly cost to be more comfortable financially.
A different reason to consider refinancing is if the loan was originally based on a poor credit score. If an individual’s credit rating has significantly improved since the loan was taken out, refinancing may lower the interest payable, reducing repayments without extending the term.
Some individuals find they are in a better position financially than they were previously and whilst they do not have sufficient funds to repay the loan in full, they can slash the repayment term so they are debt-free sooner.
Whilst not commonplace, some lenders allow overpayments on loans with no penalty, a convenient way to pay off debt more quickly without needing to refinance.
Most lenders have loan repayment calculators on their websites which allows the repayment term and monthly commitments to be played around with to find the most suitable deal, without any pressure from a salesperson.
Some companies do not include a loan repayment calculator on their website, preferring customers to contact them for a quote, but this often means customers do not have the opportunity to take as much time to consider the variables.
Refinancing can be a good idea for many people but it is important to ensure the loan is being renegotiated for the right reason and is not simply adding to the debt burden.