Are you currently servicing an installment loan that is too risky or too expensive? If so, you must struggle with timely repayment every now and then. You may have even wondered if refinancing it would help. More often than not, desperation drives borrowers into signing up for loans that they are not entirely comfortable with. If you have done a similar thing and now want to change things, refinancing may be an option that you can try. However, before going for it, make sure to find out as much as you can about it.
What is refinancing?
The basic idea behind debt refinancing is that you replace a high-risk and high-interest loan with a new loan that has better rates and terms. The new loan is essentially used to pay off the old loan. Once the high-interest installment loan account is closed, you can focus on the new loan. Debt refinancing only works and offers the desired benefits if you find a new loan that comes with lower interest rates and charges and easier repayment terms than the original installment loan. To determine whether or not refinancing is the right option for you, take the following factors into account.
Identifying and assessing your needs is crucial when it comes to refinancing an installment loan. You should do it before making any significant decision with regards to your finances. When it comes to refinancing, most people either borrow a higher sum or they take up the same amount of money as their original loan but with better repayment terms and lower interest rates. Doing the former may not always yield the best results. If you are thinking of refinancing simply because you need more money right now, the actual purpose of refinancing may be lost.
If your refinancing plan involves borrowing the same amount as the original loan but with a longer tenure and/or lower APR, you should consider how the EMIs for this loan will look like. A longer tenure is likely to make the monthly payments much smaller, which should leave you with a significant room in your budget. However, if you end up spending the money you saved through refinancing, you would lose the potential benefit. Instead, put the extra money into a savings account or an emergency fund for future use.
Refinancing an installment loan makes no sense if you end up going for a loan that has a higher APR than the original installment loan. Doing this may lead to even bigger problems than you are currently facing now. It may even push you into a debt trap! Instead, you should only refinance if you find a loan with much lower interest rate than you are currently paying. Just keep in mind, if you also go for a much longer tenure, you may end up paying more in interest charges overtime. So, make sure to do the calculations before making the decision.
This one primarily applies to borrowers with bad or no credit. Finding bad credit installment loans is fairly easy these days, thanks to online lending platforms. However, before taking up such a loan, make sure that your lender will report payments to the concerned authority. Timely payment on a bad credit installment loan can improve your FICO scores overtime. However, that will not happen if the subprime lender fails to report it.
The choice of refinancing an installment lies entirely with you and your circumstances. Take a good look at your situation and your options before making the final decision.