There may come a time where you are unable to afford monthly loan payments. Many people in this situation assume that their only option is filing for bankruptcy, but that’s not the case. If you are struggling to make ends meet, refinancing might be the solution to your financial troubles. Here’s what you need to know about this option:
What is Refinancing?
Refinancing involves eliminating an existing loan by taking out a new loan with more favorable terms. In most cases, borrowers choose to refinance loans in order to secure lower interest rates. However, borrowers can also refinance existing loans in order to extend the repayment period or switch from a variable rate to a fixed interest loan.
What Types of Loans Can Be Refinanced?
Lenders offer refinancing for many different types of loans, including:
- Car title loans
- Vehicle loans
- Personal loans issued by banks
- Student loans
It’s important to note that there is no guarantee that you will be approved for refinancing just because it is an option for these loans. However, if you are drowning in debt, exploring this option is in your best interest.
Advantages of Refinancing
Refinancing can benefit borrowers in a number of ways. The most obvious benefit of refinancing is the money you will save. Refinancing will allow you to pay off your current high-interest debt and replace it with a low-interest debt. Because the rate is lower, you won’t have to spend as much on interest. Over time, this can lead to thousands of dollars in savings.
A lower interest rate can also mean lower monthly payments. This may lower your payments by enough to make them affordable, so you won’t have to worry about the consequences of falling behind financially.
Refinancing can also help borrowers resolve their financial difficulties without taking extreme measures such as filing for bankruptcy. Filing for bankruptcy can lead to serious, long-term consequences, which is why it’s best to avoid it if possible.
Disadvantages of Refinancing
There’s no doubt that refinancing has its advantages, but it also has its disadvantages. Refinancing is not free. Lenders will charge various fees to refinance your loan, so you may end up spending thousands of dollars just to get through the process. Do the math ahead of time and make sure you will end up saving more than you will have to spend to refinance.
Refinancing a loan can impact your credit score, too. The lender that refinances your loan will run a credit check, which will appear as a hard inquiry on your credit report. Hard inquiries can temporarily lower your score, which may make it harder to secure new lines of credit.
Carefully consider these advantages and disadvantages before determining whether or not refinancing is right for you.
Now you should have a deeper understanding of what it means to refinance a loan. If you think refinancing is a good option for you, ask for quotes from multiple lenders. You don’t have to stick with the lender that issued the original loan, so it’s best to look for the best deal you can find.