Refinancing your Car Loan

It’s easy to get overwhelmed by your monthly dues when you’ve signed up for a high rating car loan. The last thing you want is to have to give up your hard-earned car for losses, so your only option seems to be to refinance.

You need to be very careful though, because refinancing schemes are also commercialized. This means that they’re dressed up to sound better than they actually are. Sure, it sounds pretty simple on paper: lower interest rates mean more monthly savings. Think again, though.

What’s not being advertised on the website are closing and other penalty fees which you incur once you decide to refinance. Before going through with the process of refinancing, consider all of these fees, and check them against the monthly savings your hoping to make with the new payment scheme.

You can’t expect to break even right away, but earning back what you’ve spent for refinancing within a year is already a good deal. The average break even point for refinancing is about three years. If the new loan allows you to earn back your losses for a longer period of time, ditch the deal and wait for a new offer.

Refinancing Mortgage Loans

As in most payment schemes refinancing schemes are also dressed up to look like the one golden solution for all your debt problems. After all, it seems only logical that the lower interest rates you have on your tab, the lesser money you will need to pay every month.

Dig deeper

You might be shocked, because refinancing actually costs money. You can’t expect banks to alter your mortgage loans for free. If you had to pay for borrowing fees through your former high interest rates in the past, shifting to a new payment scheme will mean high penalty and closing fees.

Try to look at these figures against your projected monthly savings with the new, lower interest rate. Look at your break even point and gauge if the refinancing expenses are worth it.

Break even period

Ideally, good refinancing deals will allow you to break even within the year. However, this doesn’t happen frequently, does it? A break even period of about three years is more realistic.

If your cost-benefit analysis tells you that breaking even will take more than three years, ditch the deal and look for another payment scheme.

Important

It costs you money to refinance, so as much as possible, try to stick to only one refinancing attempt. Once you think you’ve found a low rating payment scheme that will allow you to break even within 1 to 3 years, take it.

Try not to look at any more refinancing opportunities once you’ve refinanced for the first time. You only end up compounding the cost of your loans when you refinance more than once.

Refinancing your Student Loan

It’s easy to be buried in debt when you go into student loans. Some student loans charge high interest rates which are hard to keep up when you’re juggling low-paying part time jobs with hectic class schedules.

Where to begin

The first thing you need to do is to look for a credible establishment that offers lower interest rates. As in refinancing any other loan, you should check your projected monthly savings against the total cost of closing your old student loan.

Expect to have to initially dole out cash because closing the old loan is bound to incur penalty fees. The rule of the thumb here is to look for new payment schemes which will allow you to break even within 1 or 2 years.

Who handles refinancing?

You have a choice between traditional banks, credit unions, and online lenders. Aside from low interest rates, you should consider the credibility of the institution. If its an online bank or lender, try to check its soundness ratings on Bankrates.com or BauerFinancial.

Clue: not all old banks have high ratings, but most of them make it to the list. Be very wary of online lenders with no good history to back up their promises.

Things to Consider Before Refinancing

Refinancing is not always the solution to your debt problems. Sometimes refinancing without examining the terms closely only leads to more expenses. You need to think about two things before you decide to refinance: time and cost.

Cost

Refinancing can cost you money initially. You should figure out how much it costs to close your old loan. Most loans, especially those with fixed interest rates, have high penalty fees for early payments and/or term alterations.

Check these costs against your projected monthly savings from refinancing. It might take a while for you to break even. Naturally, the bank will ask for payment for the legwork included in your refinancing request.

Time

It’s important for anyone who’s thinking about refinancing to know the break even point. To do this, you need to consider the total costs of refinancing against the projected gains of your new payment scheme.

Compute your monthly savings, and try to see when it will all even out with the total cost of refinancing. If it takes more than three years to break even, ditch the idea and shop for a better payment scheme. If you can break even within a year, you should go ahead and grab the opportunity.

The Basics of Refinancing

In a nutshell, refinancing stands for the replacement of one payment scheme by another. Refinancing is mostly used for mortgage loans to either increase or decrease the interest rate. It can also be done to shorten or lengthen the cyclic payment obligations of the debtor.

Advantages of Refinancing

Refinancing can ease the debtor into a more convenient payment scheme. Ideally, it is done to reduce the cost of borrowing from the bank or a broker.

Individuals can think about refinancing if the credit card they’ve first signed up for has a high interest rate which makes it close to impossible for them to pay their dues on time.

The bank can then offer another payment scheme with a lower interest rate if the borrower agrees to pay more frequently. In other words, refinancing helps to hasten the cash flow between the borrower and the lender.

Risks

Some payment schemes that have fixed interest rates come with penalty fees for early payment or any sort of alteration. The borrower needs to check these penalty and closing fees against his/her projected savings from refinancing.

Ideally, as a borrower, you only go through refinancing if you’re sure that you can get significant savings from doing so. If altering the payment scheme leads to more expenses, then it defeats the purpose of refinancing.