The matter is simple - if you need money, you can earn it or borrow it. Your decision will depend on how urgent your need for cash is. Logically, if you don't have time to save the amount you need, you will decide to take out a loan.
Various financial arrangements on the market can be adapted to everyone's needs. Thus you can borrow money from banks and other lenders for almost anything, from buying a house to going on vacation. However, financial experts always advise you to borrow money from financial institutions only when you really need it.
But things change in life.
Your financial situation may improve because you finally get a promotion or a better-paying job. In that case, you can refinance the existing loan (or several) and thus speed up its repayment. If, on the other hand, some less fortunate events shake up your finances, you can also refinance but cut your monthly payments.
However, billigste refinansiering is something you should only do at some costs. It can be a good decision if it's well-thought and made on time. In the following, you'll learn how to recognize the right moment for taking a refinance loan.
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Your Credit Score Gets Better
When it comes to asking lenders for money, your credit score is everything. This parameter is necessary for lending institutions to make an approval decision and create a loan offer according to your current financial capabilities and creditworthiness. And the latter is clearly reflected in your credit score.
Credit score records all the good and not-so-good financial moves you've made since the beginning of your credit history. It may not reflect your current financial situation but it shows your spending habits and responsibility toward payments. And that is quite enough for lenders to assess your creditworthiness.
So, for instance, when you applied for the initial loan, you had a good credit score (about 700). In the meantime, you worked on it, and now this parameter can be considered excellent (over 800). That gives you a good initial position in negotiations to obtain a new loan on much better terms.
But even if you have yet to reach the 800+ level, you can do some simple things to improve your credit score fast. For example, keep your credit card utilization low. Then, try to find an extra source of income, and don't make unnecessary purchases - that'll reduce your DTI ratio. And, of course, always pay your obligations on time.
Your Income Increases
A salary increase, a promotion, or finding a better-paying job can favor your finances. Of course, at that moment, you have to set priorities and use that extra cash wisely. Indeed, it would be best if that allowance would go toward debt settlement, that is, if you'd use it to refinance one or more loans.
You can apply for refinancing under different conditions when you can afford to pay a higher loan installment. In this case, an installment increase means shortening the loan repayment term. Simply put, you'll settle this obligation earlier.
However, in the case of refinancing, it's essential to pay attention to early repayment fees. If your initial debt comes with high exit fees, consider whether refinancing is worth it. If you can afford to pay those costs, then refinancing makes sense.
Your Income Decreases
Unfortunately, situations opposite the one described above happen a little more often. A pay cut or job loss are unfortunate events that disturb you in many ways, but your finances will suffer the most.
At this point, you'd use a break from all monthly payments until you get back on your feet. Since that's not feasible because financial institutions don't operate on the principle of empathy, you have to find another way to get out of this situation.
Refinancing a loan is an excellent way to do this, as it can enable you to cut your monthly payments and thus unburden your monthly budget a bit. But if you're currently unemployed, you could have difficulty convincing the lender of the low risk of loan default despite needing a job. So your priority is finding a new job since lenders are only sometimes willing to approve refinancing loans to the unemployed.
If you still need to find a new job, you must prove you have enough money to cover your obligations until you find a job. These can be your savings, the spouse's income (if signed as a co-borrower), disability payments, rental income, etc. Plus, a perfect credit score is necessary, as it shows you as a low-risk borrower, despite the current unenviable situation.
Your Finances Worsen in General
Even if your income doesn't change, your finances can worsen because your debt rises. Thus your budget can get tight. Maybe you've got a baby, moved to a bigger house that triggers higher bills, or had some sudden expenses - all these things can hit your bank account hard. So this is also a good moment to think about refinancing.
If you struggle with monthly payments despite solid income, you can wait for interest drop. If you still succeed in handling debts without being late and keeping your credit score good, you can apply for refinancing loans with lower interest rates. Thus you can relieve yourself of these (hopefully current) financial difficulties.
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You Can Capture Better Interest Rate
Your credit score has stayed the same, and in the meantime, you come across convenient refinancing loans with lower interest rates than you're currently paying. That's when refinancing makes so much sense. That way, you can catch a lower interest rate on the remaining debt. It can bring lower monthly installments but also significant savings in the long run.
Capturing a better interest rate doesn't only mean lowering it but also changing its type. For example, if your initial loan comes with a variable installment, you may need help planning your budget, especially when interest rates can go wild.
That's why refinancing the loan with a new one with a fixed interest rate is a good deal. At first, it may seem more expensive, as fixed-rate allowances usually come with higher interest. But that brings security and consistent monthly payments that will stay the same during the loan lifetime.
When Isn't Refinancing a Good Idea?
Refinancing only makes sense if it doesn't bring you some benefit or relief. So you should do it to relieve the pressure on your budget and put your finances in order, not because you lack money. You can solve that problem in another, more affordable way.
The period of global interest rate growth is a good time to refinance if you can afford it with the goal of quick debt settlement. But if higher interest and larger installments don't bring you a shorter repayment period, then what's the point?
Also, refinancing only makes sense if it's small amounts. These loans will be costlier to repay earlier than under initial lending terms. Plus, the new loan can come with high origination fees that make refinancing unprofitable. Instead, you can repay your initial loan earlier.
Conclusion
Finally, never do refinancing if you are already at the end of paying off the initial loan. That would only extend the repayment period and cause you to pay more interest on the debt. So why would you prolong your agony over a few thousand dollars?
Debt management is tricky, significantly when interest rates are rising, and your budget is getting tighter. Refinancing can be a wise decision when you can afford it or when it brings you certain benefits. And paying off a loan earlier or reducing the monthly installment are undoubtedly good reasons.
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