There are few things in life that can stress a person like money problems. A lot of people have learned how to dodge calls from lenders or debt collectors and they know how stressful that can be. The stress is amplified when you have more than one creditor calling and harassing you for late or non-payment.
In situations like this, the best thing for you to do is look for a way to pay your debt so that you can be free. Although there are a number of ways that you can tackle your debts, the fastest way to do so are by taking out a refinance loan. In this article, we will take you through the basics of refinancing.
How Does Refinancing Work?
Refinancing is an arrangement through which a borrower takes out a new loan to pay off outstanding debt(s). This new loan usually comes with better terms and conditions and lower interest rates.
Apart from the consumer being swamped by debt(s), most people take out refinansieringslån (refinancing loan) when the interest rate climate has changed for the better. People, who have long-term credit facilities with fixed-term interest rates, may seek to benefit from lower interest rates by refinancing the loan.
You can take out a refi credit on your auto, mortgage, medical, student, credit card or personal loans. Although the basic requirements for refinancing all these loans are the same, there are little variations for each type.
We will use two examples here to explain how refinancing works:-
Student Loan Refi
Student loans can be gotten from federal or private lenders. But refinancing can only be gotten from private lenders. Bear in mind that when you refinance a federal loan, you lose some of the benefits that come with it. Some of these benefits include income-driven payments and federal forbearance.
A student loan is not due for repayment until the student has graduated and started earning an income. The borrower upon joining the workforce begins to pay off the debt but sometimes they find out that there are better options. In this case, the borrower looks at all these options and chooses one that suits them.
The process for taking out this facility is also the same as a regular consumer loan which is as follows:-
- Check your credit score
- Evaluate your DTI
- Explore all your options
- Apply to your preferred lender
- Sign the loan agreement upon approval
- Get your money.
However, you need to bear in mind that your credit score should be around 650-780 and your DTI(debt to income ratio) 43% with a verifiable source of steady income. This is the basic requirement but every bank will have some variations to the requirements.
So when you meet these requirements, you can go ahead and apply and then get funding to pay off the old debt. Some students take out multiple loans to see themselves through school. If you fall into this category, your lender will pay off all your debts with the new loan and then you begin to pay them. Your repayment will be based on a new agreement that will spell out the terms and conditions and the interest rate.
Before you make up your mind to refinance your student loan, consider the pros and cons:-
Pros
- Ability to save money from the lower interest rate on the new loan.
- You can get lower monthly payments with a new agreement with a longer payment duration.
- Gives you one payment that is easy to manage.
Cons
- You lose all benefits that come with the federal loan
- It is difficult to qualify for a loan with better terms because your credit score has to be high.
Credit Card Refi
This is one of the facilities that get refinanced most often. This happens when a person has multiple high-interest debts on different credit cards and seeks to use one lump sum to clear all the debts. There are different ways to do this.
You may decide to use a balance transfer card, take out a personal loan or borrow against your retirement fund. With a balance transfer card, you get a card that has a lower interest rate and better terms and you use it to pay off all the other cards.
These balance transfer cards usually come with a 0% interest rate for a period; somewhere between 12 and 18 months. This allows the borrower’s monthly payment to go towards paying off the principal. This is a very effective tool for paying off high-interest credit cards but you need a high credit score to qualify for it.
Some of these cards come with fees of 3 to 5 % of the transferred sum which may make the loan costlier.
Below are some pros and cons of balance transfer card:-
Pros
- You get 0% interest for the transfer from all your high interest cards.
- Ease of application
Cons
- Limited 0% interest duration
- Attendant fees can make the loan costlier
- You need a high credit score to qualify
If you feel that a balance transfer card doesn’t work for you, you may decide to take out a personal loan to sort out your credit card debts.
Requirements For Qualification
Through the course of this article, we have made allusion to the fact that different banks have little variation to their requirements for qualification for refi loan. But we also stated that there are basic requirements. These basics include the following:-
- Must be of legal age
- Must have a good credit score and repayment history
- Must have a verifiable source of income. In some instances, there are limits to what the income has to be per annum.
- If you want to refinance a home, you must have at least 20% equity in the home
- You must have a good DTI (debt to income ratio) of at least 43%. This is actually more important for mortgage refi.
Conclusion
What we have shared in this article is just the basics of refinancing; we advise that you research further before opting for any refinancing option. It wouldn’t hurt also to engage a financial advisor to help you make the right choice. This is because if you don’t do refinancing right, you may end up in more debt than when you started out.