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We know there’s a lot going on in the world right now, but there is some good news that could help your finances (yes, really).
In March 2020, the Federal Reserve cut rates to practically zero in an attempt to revive the economy and encourage borrowers to spend. Low rates often mean it’s a good time to refinance loans. That’s because when you refinance, you can score a better deal and save money.
At this point, you may want to know: What does it mean to refinance a loan? You may also be curious about how to refinance a loan. Read on to learn more.
What does it mean to refinance a loan?
Refinancing a loan is a way to score a lower interest rate and make payments on your loans more manageable.
In a nutshell, your new loan pays off your old loan and you’re left with a single loan at a better rate. If you have multiple student loans, for example, refinancing is a way to lower your interest rates and consolidate your loans. This means you have only one monthly payment and you’ll generally pay less in interest.
How to refinance a loan
If you’re wondering how to refinance a loan, there are several important things you should do.
First, take a look at the loan amount, loan terms, and interest rates. Additionally, you’ll want to review and compare new lenders and the interest rates they’re offering.
Remember: When you refinance, the goal is to get a better interest rate so you can save money. So, before you choose a new lender, make sure you understand the terms on your new refinancing loan. This includes your repayment term, including monthly payments and APR. Once approved for your new loan, your old loan will be paid off. Below we cover 4 ways to refinance loans.
1. Refinancing student loans
In the past few years, many student loan refinancing companies have emerged on the scene. For student loan borrowers looking to save money on interest (which accrues daily), refinancing can be a smart move.
It’s also a good idea to understand the types of student loans you have. This way you can look for a better deal. Federal student loan interest rates, for example, are fixed and stay the same throughout the course of your repayment. Graduate and Parent PLUS loans, on the other hand, have the highest interest rates and can be costly. For example, when I was paying off my Grad PLUS loans, it was costing me $11 per day in interest.
How do you refinance student loans?
When you refinance a student loan, you apply with a student loan refinancing lender like SoFi, CommonBond or Earnest. Based on your credit, you’ll get approved for an interest rate and terms. If you accept, your new refinancing loan will pay off your student loans. Those will be wiped out and you’ll only have to deal with the one refinancing loan with a lower interest rate.
Saving money on interest so you can attack the loan principal can help get you out of debt faster. While that’s good news, there are still some things to keep in mind.
For instance, if you refinance your federal student loans, you may end up losing important protections and benefits. Federal student loans offer student loan forgiveness options, income-driven repayment, and deferment and forbearance options. If you refinance, you’ll effectively pay off those federal loans, so you won’t have access to any of those benefits.
Private student loans, on the other hand, are different from federal loans. Namely, there is less risk as you’ll go from one private lender to another.
2. Refinancing credit card debt
Credit card debt is notorious for having high interest rates. In fact, the average credit card APR is 16.87 percent, according to CreditCards.com.
If you’ve racked up credit card debt, you’re probably wondering how you can pay it off faster and not pay as much in interest. Well, credit card refinancing can help you do this.
There are two ways you can refinance your credit card debt. First off, you can apply for a balance transfer credit card, which typically has a low APR for a specific period of time. Many of these cards offer 0 percent APR during the promotional period. Once the promotional period is over, your APR will jump back up to “normal” levels. You’ll also want to be aware of any balance transfer fees.
A second option is to get a personal loan that has a lower interest rate. Using a personal loan, you can pay off your credit card debt. Then, you’ll be left with a personal loan at a lower rate to pay back.
Either of these options can work, but they’re typically reserved for people who have strong credit. Additionally, you want to have a clear strategy to pay off the debt.
3. Refinance a car loan
You might be curious how to refinance a car loan and save money this way.
For starters, you can apply for an auto refinancing loan. If you get approved, your new auto refinancing loan can pay off your current loan. And, because your new loan has a lower rate, you’ll save you money in the long-run.
4. Refinancing a home loan
If you’re saddled with a home mortgage, you might be tempted to refinance. Given the lower interest rates at this time, you may be able to save a significant amount of money on your monthly mortgage payment.
If you’ve never refinanced a mortgage, this is the process of taking out a new loan at a better rate. You may also be able to shift from an adjustable interest rate to a fixed interest rate. To get started, check out various refinancing lenders and look at repayment terms that work for you.
Should you refinance your loans?
The economy is changing and many people are saying we’re headed toward a recession. While that can be stressful, it’s also a good time to evaluate your debt situation and see if you can save money.
Before you refinance, however, make sure you look at the eligibility requirements for new lenders. While some refinancing loans offer more favorable terms, some might shift your repayment term and increase your monthly payment. Also, shuffling your debt from one loan to another isn’t a good idea. So, be clear on your debt repayment strategy so you don’t end up taking on more debt.