Loans are never easy to deal with, especially when we have an average salary, bills to pay, and a kid that wants the latest Iron Man costume for Halloween. Before you know it, you’re in debt so deep that refinancing seems to be the only solution.
And indeed, if approached correctly, refinancing your personal loans can be a lifesaver. But if you are considering refinancing, you also need to understand the things that come with it.
How Refinancing Personal Loans Works
Refinancing a personal loan works pretty much by the same principle of a home loan refinancing. You take out a loan that covers the sum you still have to pay for your loan and use this second one to pay it off.
The amount of debt will be there still, but the difference is that you can work on the rates and make the payments more affordable.
Why Should I Refinance?
There are several reasons why people decide to go for refinancing their personal loans, but it generally boils down to debt consolidation or switching to a better deal. Here’s how people save money using the two:
Debt Consolidation
If you decide to refinance because you want to consolidate your debts, you will first have to do some calculations. First of all, you need to see exactly how much you are paying every month for your current loans. Here, you will have to include any fees, charges, and rates that come with your initial loan.
After that, you need to compare the results to see exactly how much you are expected to pay for the consolidated version. In these circumstances, a debt consolidation loan calculator may be able to simplify the process and tell you exactly what goes where.
Switching for a Better Deal
If you believe that you found a better deal, you may want to, one more, opt for using a repayment calculator for personal loans. These calculators will allow you to compare the costs and see whether or not it’s worth to make the switch or not.
Keep in mind that interest rates aren’t the only thing you should pay attention to. Check the ongoing fees, but also the loan establishment costs. Keep in mind that some loans will charge extra for early repayments while others will not allow you to pay early at all. Sometimes, the penalties aren’t worth the switch.
How to Refinance to Get a Better Deal
We know why people choose to refinance their personal loans – now we need to find out how. Long story short, this is how it goes down:
Compare your loan options
Weigh your available options and calculate whether or not it’s worth it to go forward with your refinancing plan.
Calculate your refinancing costs
This will include any exit or break fees, as well as the establishment charges for the new personal loan. This will once more ensure that making the change will be worth your while.
Apply for the loan
If you fit the criteria, you can proceed to submit your application. You may have to keep in mind that the purpose of this loan is to either refinance or consolidate your debt.
Pay off your existent loan with the money from the second one. If the purpose of the loan is for debt consolidation, then the lender may be able to arrange this for you and save you the hassle. However, if you want to change for another deal, then you will have to make the deposits yourself.
Ensure that the old loan has been closed. You may want to contact your lender to make sure that the old loan has been terminated and that you no longer owe any balance.
Refinancing is fairly easy, and it’s not the pile of confusing paperwork that everyone seems to expect. It’s no different than taking out the first loan.
Is Refinancing Worth It?
The value of the refinance generally depends on the first loan, but also on your current financial situation. To determine whether or not it’s worth it, you’ll need to calculate the costs of your previous loan and compare them with the new one.
Include all the costs, not only the interest rate – especially if you are nearing the end of your loan. If you realise that you save at least 1% of the money you owe, then it’s worth it to go on with the refinancing.
