Loans can be difficult to navigate. This isn’t exactly a secret for most of us. It can feel like a minefield, trying to figure out what we should do about these credit agreements.
This is especially true when we are trying to figure out ways to better cope with debt. Often, it feels like debt is a bad or dirty word. How can we reduce the stigma and stress surrounding these things?
Today, we’re here to take a look at that. We’ll be examining what loans are, as well as how they work. Additionally, we’ll be exploring the concept of refinancing. If you want to learn about the beste refinansiering options, make sure to stay tuned.
The Basics of Lending
Naturally, before we can get into the complicated stuff surrounding refinancing, we need to start off with the basics. Let’s take a look at some of the key components of loans. That way, you’ll know exactly what we’re referring to.
Key Terms
As with most things, there are some key terms and phrases to familiarize yourself with. We’ll go through a list. Just remember that this isn’t necessarily comprehensive.
Principal: This is the initial amount of money that is borrowed.
Interest: This is the big one that we hear the most about. It’s the cost of borrowing money. Basically, the lender charges a percentage of the principal each month. This is then classified as an interest rate.
Term: Term refers to the length of the credit agreement, in this context.
Repayments: Once the loan “term” is over, the borrower needs to pay the money back. As you can probably guess, these payments are known as repayments.
Collateral: These aren’t applicable in every loan. However, for borrowers who don’t have high credit, it could be important. Collateral is something that a borrower promises to a lender if they fail to repay the loan. Mortgages are an example of a loan with collateral.
Obviously, there are more aspects of loans to be aware of. However, for our purposes today, we’ll be shifting focus. Let’s look at refinancing.
What is Refinancing?
With the basics out of the way, we can turn our attention to our main focus today. What is refinancing, anyway? Well, we’ll do our best to offer a definition.
Simply put, it’s when we take out a loan in order to replace one that we already had. The new one will probably have different terms. That’s the main appeal for most folks.
Reasons to Refinance
Reasons to RefinanceAt first, this may seem strange. Why would we want to do go through this process? Well, there are a few key reasons. You may find one that resonates with you!
Lowering Interest Rates
Starting off strong, we have the primary reason for most refinancing loans. Interest rates can get expensive for borrowers. Additionally, they’re influenced by several factors. These include credit scores, the general economy, and what lender you’re working with.
Therefore, there’s a decent chance that refinancing can get you a loan with a lower interest rate. Just remember that this may take some research. It may also take some work.
Try to compare your options before agreeing to any new credit agreement. Ensure that you’ll be getting what you want out of the new one. If that means a lower interest rate, then be sure to place emphasis on that.
Changing the Loan Term
Sometimes we agree to a long loan when we would prefer to shorten it. That’s another place where refinancing can come in handy. We see this a lot with mortgages, where people will shorten the term from thirty years to something like fifteen years.
Why might they want that? Well, it can reduce interest costs. There may still be fees involved, though. It won’t always be beneficial to do this.
Debt Consolidation
The final reason we’d like to cover is this one. Many people decide to refinance their loans to consolidate their debt. They may get one new credit agreement to replace several smaller ones. It will depend on each individual situation.
Why do this? Consolidation can help reduce stress about repayments. After all, by putting them all together, we have less to keep track of.
Additionally, it could reduce the interest rates on all of those previous debts at once. That won’t always be the case, but it’s worth a try!
How Does Refinancing Work?
One thing that you may still be wondering is, of course, how this process works. Thankfully, it’s pretty simple. In fact, there’s not much different from a regular loan.
Assessment
The first thing you’ll want to do as a borrower is take a moment to think about your current finances. Has your credit score improved? Would refinancing really benefit you?
Once you’ve figured that out, you can move on.
Application
Just like every other credit agreement, you’ll have to submit an application. The lender will want information like your credit score. They could also ask for proof of income, tax documents, and personal identification.
Remember, you can apply with several different lenders at once. Just don’t do this with too many at once. After all, credit checks will decrease your score for a few months.
Loan Estimate
Once the lender reviews your application, they’ll provide you with an estimate. This should outline what the terms of the new loan are. Typically, that will include the interest rate, repayment schedule, and any fees involved.
Approval
Once both parties agree to the terms, then the application gets approved. You will receive the refinancing loan in whatever way works best for you. Sometimes, the lender will even directly buy out the previous debt.
Is Refinancing Worth it?
It’s hard to answer this question. At least to an extent, it’s subjective. Each borrower has to decide for themselves whether or not refinancing is worth it for them.
However, if you’re able to get a more favorable interest rate, it’s hard to deny the benefits. Do your best to find a refinancing option that benefits you.
