In an ideal world our expenses are lower than our incomes and we all lead a happy and debt-free life.
In reality however, life throws several curve-balls at us and there are many circumstances and situations where our incomes our just not enough.
Therefore we end up borrowing money and taking loans. They might be a good loan or a bad loan.
Fundamentally, good loans are those which help you make money. Therefore loans such as those borrowed for educational purposes, for starting small business ventures, or for prudent investing can be called as good loans.
Bad loans are those such as vehicle loans or personal loans which are taken for spending on holidays or medical needs. Loans for purchasing consumables such as refurbishing your home would also most likely fall under this category. These do not really give you a return on investment and deteriorate in value over time.
Technically not all good loans turn out to be good though. To elaborate, if you took a student loan the understanding is that you would pay the loan back once you finish your education and go to work.
But in times such as these it can be really hard to find a job in the first place. Or you might decide that this line of work isn’t really your cup of tea and hence decide to ditch it and go travel the world instead. Chances of you repaying that student loan becomes bleak and hence what sounded like a good loan on paper could eventually become a bad loan.
A similar scenario might arise with loans that are taken for your business ventures as well, wherein your business ends up with losses. Again the potentially good loan turns into a bad loan.
At times, certain changes – such as financing your child’s education or the need to redesign your house – can demand more from us. At such times, instead of going ahead and borrowing even more money, you could consider going the refinancing route. But before you opt for refinancing, here are some points to ponder:
Refinancing is the process by which you pay off and close one loan by taking out another loan, which comes with its own terms. Refinancing can be a lifesaver for many who are struggling to manage their debts.
First and foremost, ask yourself if you have the bandwidth and resources to go hunting for refinance. Refinancing is not easy. It is not a shortcut to clearing out your debts. It involves a lot of legwork, research and analysis, just like what your original loan involved because it is a huge financial commitment.
You cannot afford to rush into refinancing. You need to find good, reliable lenders who are willing to refinance you at good rates. Therefore make sure that you have the time and energy to go about a refinancing loan – and be prepared for a load of paperwork!
Not everyone actually qualifies for refinance. But if you have a steady job and a good credit score, chances are that you would qualify for refinancing. An interesting point to note. Refinancing is suggested by many as a feasible way to consolidate your debts. Say, you have a mortgage and also a solid amount of credit card debt and you would like to club all your debts together. It does make managing your debts easier, no doubt.
But if you are prone to raking up debts on your credit card, then far from being a blessing, refinancing could possibly end up piling on the debt. It isn’t wrong to need more money from time to time but financial discipline and responsibility will keep you away from bankruptcy.
Also consider how much of the original debt have you already paid off. If you have paid off a substantial amount then going for refinancing might not be a great idea.
Yet another thing to remember is that closing off the previous loan prematurely can incur closing fees. One potential risk of a refinanced loan is that in certain states of the US, mortgage loans that are refinanced can be considered as a recourse loan. What does this mean?
Let me break it down for you. In a non-recourse loan if the borrower defaults on his loan, the lender can sell the collateral and take the proceeds obtained from the sale. For instance, it could be a house in case of a mortgage loan or a car in case of an auto loan. However, he cannot exercise any further ownership on the borrower’s other assets.
In a non-recourse loan, the lender can go after the borrower’s other assets if there happens to be a deficit in the sale of the collateral. Laws governing refinance loans tend to vary from state to state. Depending on your location in the US, you would need to find out about the laws in your state.
There are several things that you might gain from refinancing, depending on the type of debt as well as your needs. For example, you could perhaps enjoy a lower interest rate or decrease the amount of money you pay for every installment or lengthen the duration of the loan.
If the value of the collateral on which the loan is based has increased significantly, then you could go for a cash-out. As a result you get a certain amount of money in your hand, which you could put to good use. Please note the words “good use”. Naturally, if you fritter away the extra cash in unnecessary or imprudent expenses then this option doesn’t add any value at all.
If you have an Adjustable Rate Mortgage,refinancing with a fixed interest rate at times when interest rates are low can be beneficial. It might save you from the risk of fluctuating interest rates.
Once you decide to go the refinancing route, it is likely that you would be bombarded with a zillion financial jargons. Therefore it only makes sense to do your research and to put in some time and effort to understand the terminologies involved.
There are many different types of loans out there like auto loans, medical loans and personal loans. The most common types of loans that are usually in need of refinance are house mortgages, student loans and credit card debt.
Say you worked really hard at your job and got promoted which comes with a significant raise. Now, you might certainly be tempted to go for a refinance loan since you have more income at your disposal. It only makes sense to realign your loan so that you can pay higher installments but close it down quicker than originally intended, right? But wait a moment.
Have you thought about putting the money into any investment plans or contributing towards a reliable nest egg which will come in handy when you eventually grow old and retire? There is no point in paying off your loan in a jiffy and then realizing that you have hardly any savings to depend on upon retirement.
Look at the bigger picture and consider if it makes more sense to perhaps improve your savings instead of closing the loan sooner.
If there are chances of you relocating in the near future then it is better to hold off on refinancing any mortgage loans that you might have. Of course no can predict what might happen several years down the line and taking a loan should certainly not prevent you from selling or moving if necessary.
However, statistics show that if you have no plans of selling your home in the next few years then it is better to not go for refinance. The downside is that refinancing your mortgage loan could potentially be a dampener to any relocation plans that you might have been dreaming about.
It is a well-known fact that student loans are one of the biggest area of outstanding debts in a financial institution. The very nature of student loans makes it hard to foresee if a particular borrower would repay the loan or not.
There are different types of student loans out there but if you are considering refinance for a federal student loan then experts advise against it. This is because federal student loans come with many benefits such as income-based repayment plans and flexibility in repayment among other things.
What’s more, federal student loans even offer something known as Public Service Loan Forgiveness, where a part of your debt is forgiven if you are working for a legitimate non-profit organization. Be advised that you might lose out on such advantages if you go for a refinance of a federal student loan.
There are several refinance calculators available online to help you figure out just how much you might end up saving with refinancing. All you need to do is enter details such as your current loan amount, current interest rate and current term of the loan. Then you also enter the new loan amount, the new interest rate, the new loan duration as well as any refinancing fees that would be involved. This will help give a clear picture about what you stand to save if you go for refinancing.
There is a direct link between your profession and the decision to refinance your loan. Stable jobs, professional degrees and highly rewarding professions are generally in favour with creditors.
The reasoning is pretty obvious. People in high profile jobs are more likely to repay their debts than people in lower paying jobs who might have difficulties in making ends meet. Therefore if you happen to be in a relatively lower paying sector or have an unsteady job, then you might find it difficult to get a refinancing loan at a decent rate.
A credit score is basically an indicator of your financial health. It is tracked by credit reporting agencies such as Experian and Equifax based on your financial profile and history such as outstanding debts, credit card payments etc. A good credit score indicates that you are financially reliable. Therefore the higher the credit score the better are your chances of obtaining a refinancing loan.
Further, a higher credit score can also help you get a better interest rate as compared to someone else with a lower credit score. Creditors are by no means lining up to generously offer refinance loans in this rather fickle economy. Usually credit scores higher than 700 are considered to be healthy.
Normally people who have just recently started working, or have too short a credit history or those who make too many credit inquiries are tagged with low credit scores. Here is a small table that elaborates on factors that can adversely affect credit scores:
FACTORS AFFECTING CREDIT SCORES
IMPACT ON CREDIT SCORE
|Debt||Decrease||Try to clear outstanding debts|
|Delayed Payments||Decrease||Set reminders to make payments on time|
|Short Credit History||Decrease||Keep building credit history by being financially reliable|
|Credit Inquiries||Decrease||Avoid unless absolutely necessary|
|Credit Cards Balance||Decrease||Keep balance low|
If you have been prompt with your payments then you don’t really have to worry too much about getting a low credit score. Find out your credit score from the online websites of the credit reporting agencies.
Refinancing comes with its own set of positives and negatives. Talk to different lenders and people who have been in similar situations before deciding whether refinancing is the wise and apt choice for you.