Refinancing is usually about getting better conditions, but not always. Moving debt can also be a measure to avoid debt collection, to reduce worries, or to fund an investment. Here you can read about the pros and cons, as well as some important things to consider when refinancing your loans.
Delete expensive debt from credit card and consumer loans
Expensive debt is what is most often refinanced. Here credit cards and small consumer loans are in a special position. These products usually have the most expensive interest terms, in addition to relatively high fees. Among the badgers we find credit cards with interest rates in excess of 30%, and so-called micro loans with effective interest rates of several hundred percent.
However, it is expected that such debt will be settled quickly (interest is always stated per year). In the case of micro-loans, there may be talk of only one month. The interest rate may then not be so important in isolation, as long as the debt is settled in time. The problems with this type of debt are when a person has multiple loans or credits and fails to pay off the repayments. If the debt runs long enough, the problems are formally queued.
The purpose is to cut costs
Unfortunately, more and more of us end up in situations as described above. We see this both in statistical overviews and in the focus of the banks. It is no longer advertised as often with loan options for various common purposes. Instead, banks present solutions for how you can get total animal debt, with examples of how much you can save.
Vigilant borrowers also refinance their loans, even though they have not ended up in any kind of financial handicap. For these, it is all about shopping for better conditions. This is not unlike what many do when it comes to, for example, power agreements, or subscriptions to mobile telephony and broadband. The cheapest bank or supplier always captures new customers from competitors.
An average family of children can save large amounts on loan refinancing.
Lower repayments are one advantage
The cut in costs is probably in the minds of all who refinance their loans, but some focus more on reducing fixed payments. An example is people who just manage the monthly living expenses, and who have loans or credits as well. The revenue may be so that the wheels go around with an emergency scream. Nothing ends up with debt collection and delinquency, but there is no room for any excesses either.
A refinancing can then aim to reduce the monthly installments. This is despite the fact that the total cost after the repayment is higher. This is done by extending the loan repayment period. In most cases, the loan period is extended in the bank we already use. Alternatively, we can choose to transfer the loan to a more benevolent bank.
Also a mental aspect
There are several psychological benefits to be gained for those who refinance animal debt. The reduction of costs is of course important. We feel we are getting better control of the economy, and we may be able to afford things we previously could not afford. For some, refinancing is also an important step in avoiding debt collection cases.
The fear of getting into debt problems can take over completely for some, leading to some kind of paralysis. We know from both professionals and media stories that many end up not daring to open their letters. The fear of sour reminders of unpaid installments can be a serious stress.
Other reasons to choose a refinancing solution
If you change the size of the loan to get funds for renovation, this is also a kind of refinancing.
A refinancing can also mean that we take on higher debt. Here are some examples of this:
- Extension of mortgage to refurbish.
- Extension of mortgages to provide equity for secondary housing.
- Extension of mortgages for other investments.
- Extension of mortgages to help children with equity to housing.
Such holdings are also called refinancing, although the bank is the same both before and after. However, it is quite common for refinancing in these situations to transfer the loan to another bank.
If you are a secure payer, have a mortgage to pledge, and in addition have spacious finances, the banks will gladly compete for you as a customer. This is discovering more and more of us. We are far less loyal to the banks today, compared to before. When we then need more money, we take the opportunity to get better deals than we had.
Difference between a secured and unsecured loan
We also distinguish between refinancing with and without collateral. By security, the bank we borrow from means a mortgage on an object we own. As a rule, we are talking about a home we borrow, or another high-value object, such as vehicles, boats and cabins.
Refinancing without collateral is when we use an unsecured consumer loan to pay off other debt. The requirements for obtaining these loans are lower, but the absence of mortgage insurance means that interest costs will be higher than when the loan is secured.
Much to save if you know the terms of interest
Many people cut their costs by refinancing credit card debt.
If you are going to refinance debt from a consumer loan or credit card, consider the following approximate terms:
- A cheap consumer loan has effective interest rates of about 9% to 10%.
- An expensive consumer loan has effective interest rates around 20%.
- An expensive small loan or micro loan may have interest rates of several hundred percent.
- A cheap credit card has effective interest rates of about 15%.
- An expensive credit card has effective interest rates of about 35%.
If your credits and loans are of the expensive kind, you will most likely be able to save large sums by refinancing. The impact will be particularly significant if you have more loans or credits. When you collect the debt, you save on both lower interest rates and fewer forward costs.
This is how you get the cheapest possible loan
The most important thing when it comes to refinancing loans is to obtain a sufficient number of offers. You have no way of knowing which loan is the cheapest if you only apply to a single bank. This is especially true of consumer loans, since the banks here operate with different interest terms for each customer.
With that in mind, we suggest the following steps to refinance:
- Use a finance agent, or search for as many banks as you can.
- Obtain equal offers from all banks (total cost and down payment).
- Choose the offer that offers the most savings.
In addition, you can improve your credit rating if you refinance with a co-borrower. In this case, this should be one with which you already have a shared economy (spouse or cohabitant). When two are responsible for the new loan, banks usually provide better interest rates.