Refinansiering – How to Refinance a Consumer Loan
A refinance is a loan option that allows you to exchange the terms of your existing loans with another with lower interest rates, longer payment duration, or both. And because interest rates are constantly changing, you can leverage this to save more by paying lower interest rates or even increasing your payment duration.
You can follow some steps in refinansiering forbrukslån (refinancing consumer loans). You can start by figuring out the exact amount you need. Then, you can compare that with the available loan options and rates before applying.
While refinancing is a good option for borrowers, understanding how to apply for it is as good as knowing to add plenty of cheese to a cheeseburger. Also, knowing how this option affects your credit score will help you decide whether you will take it or not. So, we will explain these points in the sections below.
Five Steps to Refinance a Consumer Loan
Exchanging your old loans with a new one with better terms is a good decision. So, here are a few steps you can take to start.
- Decide on the loan amount you need
- Research your options
- Compare different rates
- Fill out an application form
- Clear your old debts and plan for the new one
Step 1: Decide on the Loan Amount You Need
The new loan you are taking should be able to pay for all your previous debts. So, take out time to calculate all the loan amounts and other fees or penalties.
For instance, some lenders charge a fee as a prepayment penalty. So might still be left with some uncleared debt if you do not know this. Therefore, ensure that you add these charges plus an extra amount to allow for miscellaneous expenses.
You can find more information about your fees in your loan dashboard on your lender’s website. Or you can call your lender to inquire about your prepayment fees and outstanding repayment balance.
Step 2: Research Your Options
The first place to start looking for refinancing loans is your current lender. The bank or online lender you borrowed from will likely offer such loan options.
Also, you have a higher chance of approval since you are an existing borrower. And more so if you have a good relationship with them and consistently keep up with payments and deadlines.
You can read more about it on your lender’s official site. Or, call a customer service representative to put you through the process if you cannot find enough details on the website.
You can also use other lenders to refinance your loans. So, do a preliminary search on the internet for lenders with the best rates.
There are several online lenders and banks that refinance consumer loans. So, make your search as specific and detailed as possible.
For instance, you can enter a search for top online lenders for refinancing personal loans in Florida instead of refinancing lenders. Another example will be lenders with the best refinancing rates for poor credit scores instead of a general search phrase.
The internet houses a lot of information; some are irrelevant to your search. So, writing a more specific search phrase provides a better chance of getting the answer you desire.
Furthermore, try to learn more about lenders and their refinance terms. For example, you should check out the minimum credit score requirement for a given rate.
The higher your credit score, the better the rate. However, different lenders offer varying rates.
So, you can make a list of lenders that refinance consumer loans. Then, write out their rates, credit score requirements, minimum and maximum loan limits, and payment duration.
Step 3: Compare Rates
The goal of refinancing is to get better rates. And this is possible when you compare rates from several lenders.
While your current lender might not offer you a comfortable refinancing rate, you can shop for better ones. However, there are a few things to consider while at it.
You will want to check the APR, loan duration, and credit score requirement. Also, using a lender with quality customer service is vital.
The best lenders have all details about their loans and terms on their official websites. However, you can contact an account representative using the contact information on the site if you have more questions.
Look for the refinance rate for your credit score on each lender’s platform and compare them. Also, remember the duration of your previous debt and the prepayment penalty because they contribute to your new loan amount.
For instance, you will be spending more if you refinance a loan of two years duration and a yearly interest of 3% with one of 2.5% interest and duration of four years. This is because your new loan has longer payment duration, requiring you to pay more (plus any prepayment penalties or charges).
So do a few calculations while you compare rates. It may be tricky, but it is worth it.
The ideal step is to take a lower rate with the same payment duration. But you can look for loans with rates far lower than your previous ones if you want an extended payment period.
Step 4: Fill Out an Application Form
Typically, you will fill out the forms online. However, online forms are a thing for online lenders, but you might need to visit your bank branch if you are using them.
Filling the forms takes less time, but if your documents are not ready, you might spend more time trying to sort them. So, prepare your documents beforehand; scan them, and store them in your drive and on your PC.
Here are a few documents you might need:
- Employer’s details
- Utility bill (recent copies not later than three months)
- Bank statement (recent copies)
- Tax documents (recent copies)
With all your documents available, you can proceed with registration. Also ensure you fill out the correct details.
Before submitting, crosscheck your financial details and credit score. You can call their customer support if you need help.
Step 5: Clear Your Old Debts and Plan for the New One
Your refinance loan should be in your account a few working days or weeks after verifying your details. And you will also receive an email of confirmation with the period.
Use the funds to settle your old debts and other penalties. Your old debts will still accrue more interest if you do not clear them immediately. So, do it as fast as possible.
In addition, remember that your refinance does not make you debt-free. So, plan toward clearing your new loan.
You can set out a deposit account for monthly recurring payments to your lender. Or do anything that resonates well with you. But ensure you keep to the deadlines.
Pros and Cons of Refinancing
Some of the benefits of refinancing include low-interest rates and options to extend the loan period. However, it can negatively impact your credit score and might accrue some extra fees.
We will outline the pros and cons of refinancing in this section.
Pros of Refinancing
- You will enjoy better interest rates. The purpose of refinancing is to pay off other debts while getting a reduced interest rate. Also, the rates are competitive and attractive since several lenders offer this service. So, you have more choices, especially if you have a good credit score.
- You can settle your debts faster. Being indebted does not appeal to anyone. So, you can speed up your payments with shorter payment duration. And while this will help you clear your debts faster, you will also enjoy paying less.
- You can extend the repayment duration. In refinancing, you can exchange your previous loan terms with a new one. And this includes payment duration. So, you can increase your repayment timeline to enable you to pay smaller amounts over a longer period.
Cons of Refinancing
- You may pay prepayment penalties. A prepayment penalty is a fee you pay for paying off a loan before the agreed duration. And paying off your old debts with a refinance can result in this. However, you can add the prepayment penalties to the new loan before taking it.
- It can affect your credit score. This is because you are taking out a new loan. So, lenders will have to do a credit check (usually a hard inquiry); this reduces your credit score. However, the reduction is little and will return to normal if you repay debts on time.
- You might pay more interest. Refinancing for an extended time will help you repay without pressure. However, you might pay more interest since you are repaying over a longer period. But if you are comfortable with this, go ahead.
- Finding and applying to a lender might be tasking. You will have to discover and compare several rates and terms from different lenders. And this might be monotonous and boring for you. Also, preparing the documents for the application might be tedious.
Look for lenders with enough details about their refinancing terms on their websites. And avoid those with scanty information; they might as well have hidden charges. In addition, read reviews of several lenders and follow their application process.