Editor’s note: This is a guest post from Pauline of InvestmentZen.com
Refinancing, restructuring, or consolidating debt is a step that many have taken in order to become debt-free sooner. This is done for a multitude of reasons but usually involve getting a better interest rate, or term on your debt, making the final pay off cheaper and quicker. This works in different ways. The idea is either to lower your debt payments, or to pay off debt quicker, for a lower interest rate.
Before you start, do some research and find out the best rates available on the market. The internet is a great place to begin. You can find and compare different loans, and there are calculators allowing you to input information regarding your loan such as amount, rate, and interest to see what a new lender could offer.
Now that you know what you can get elsewhere, have a talk with your original lender. They will often try to provide the service you are looking for in hopes of keeping you as a customer. They can give you the option of rolling over your existing loans on a lower interest rate, or have you close on a completely new loan.
If you explain you have seen much better offers with competitors, they will likely match or better the terms. It will have to be a real offer though. The rates you see on the homepage of a lender may not apply to you based on your credit score and other personal circumstances. But before you take your business elsewhere, try the easy way and ask for a match.
Keep in mind the closing costs. Just because it is easier, doesn’t mean it will be cheaper. The closing costs can sometimes not be worth a refinance. That happens when you have just a few months left on your loan, so there is little time to absorb the administrative fees.
If you have unsecured debt, like a credit card balance or a personal loan, look into cards with a 0% balance transfer. These cards offer a 0% interest rate for anywhere from 12-24 months, allowing you to pay just what you owe to get rid of your debt. These cards save you money over the long run. The catch is that some cards will revert to a high interest rate if you fail to make the minimum payment one month. And after the 0% deal is over, the rate is rarely competitive. By meeting your obligations each month, you will boost your credit score, making more beneficial rates and terms available to you in the future.
Not all cards are created equal. If restructuring your debt this way, make sure you are getting the most bang for your buck by comparing cards and choosing the one with the best 0% term, lowest balance transfer fee, and if possible, lowest interest rate once the 0% deal is over. Make a note in your calendar a month or so before the deal expires, and look for another balance transfer card if you haven’t finished paying your debt.
Keep in mind that refinancing isn’t always the best choice. Refinancing can make you lose protections that a current lender provides. For instance, federal student loans have certain protections. If you refinance these, you will lose those protections. Refinancing student loans is worth it when you start making a little more money, and can afford higher monthly payments. A new lender should be able to offer you a shorter term and interest rate.
Fixed rate versus variable rate is another thing to look into. If you are going to be able to pay off the new loan quickly, then a variable rate may be a good option. If you are looking for a long term loan, a fixed rate may be the way to go. A fixed rate loan is usually higher than a variable rate, but take into consideration interest rate changes. If the interest rate is likely to go up a significant amount before you pay the loan off, that initial higher rate can be good.
A few things to keep in mind when refinancing:
- The new total payoff should be lower than the amount you currently owe. Unless you are refinancing because you can’t meet your current obligations and make minimum payments, in which case a longer term will probably incur a higher total payoff.
- Shop around for the best lender. Don’t be afraid to apply for multiple loans at once. Go back to several lenders with your best offer and ask them to better it.
- Keep an eye on the closing costs or other fees associated with refinancing. What matters is the total cost of the loan, not just the interest rate.
- Consider any possible loss of protections being offered by the current lender.
- Look into credit cards with a 0% transfer balance if your credit score is good enough.
- As a last resort, if your debt payments are too high, you might consider bankruptcy. Talk to an independent advisor about what it involves exactly. Refinancing to a longer term for lower payments will be more costly but it won’t ruin your credit and you will be able to apply for more loans in the future, whereas bankruptcy prevents you from doing so for several years.
In a world where lenders are competing for your loans, you, as a customer, have a great chance of getting what you desire when refinancing your debt. So don’t hesitate to drive a hard bargain.