Guest Post by Patty Moore
Did you know that you can refinance more than just your home?
When you think of refinancing, chances are that the first thing that pops into your mind is refinancing your mortgage to shave a point or two off of your current interest rate. Yet, what many people are not aware of is that you can refinance almost any type of debt — and that doing so can save you thousands of dollars.
Refinancing is the process of applying for a new loan to replace an existing loan or debt. Many Americans have used refinancing to obtain a lower interest rate on their mortgage. This usually occurs when the interest rates fall, or their credit score improves. This process can be done for other types of debt such as student loans, credit card debt, and even car loans. Read on to learn how you can refinance your debts to save yourself thousands of dollars.
Car Loan Refinancing
Many people find themselves in unfavorable car loan agreements which means they are paying far more than they anticipated each month for their vehicle. Auto loan Refinancing may be a way to help reduce those payments, pay off their car loan sooner, or meet other goals. Through car loan refinancing, a borrower applies for a new loan, then uses it to pay off an existing loan. The vehicle serves as collateral for the new loan. Typically, the new car loan will have different loan terms that may be more advantageous to the borrower. This often includes a lower interest rate, which may result in lower monthly payments, or in lower interest paid overall.
Alternatively, a borrower could discuss either a longer loan term or a shorter loan term with their current loan provider. A longer loan term would reduce the monthly payment, which would mean that the total amount of interest paid is higher over the life of the loan. In contrast, a shorter loan term increases monthly payments, but would reduce the overall interest paid over the life of the loan.
Student Loan Refinancing
Student loan refinancing is available to student loan borrowers. It is available through private banks and other lenders. With refinancing, a borrower essentially applies for a new loan to replace an existing student loan or loans. Oftentimes, this results in a lower interest rate, leading to savings over the life of a loan.
Typically, it is hard to qualify for a lower interest rate because banks only work with creditworthy consumers. However, once a borrower has graduated and worked a steady job, they are more likely to receive a lower rate after making on-time payments and building a favorable credit score. If an application goes through successfully, a borrower should be able to obtain a lower and/or fixed interest rate loan that can ultimately save thousands on interest payments over the life of a loan.
Both private and federal student loans can be refinanced together. However, borrowers should be aware that if they refinance their federal student loans along with their private student loans, they will lose any protections from the federal government such as the potential for student loan forgiveness or eligibility for income-driven repayment programs.
Refinance Revolving Debt to a Fixed Term
Refinancing credit card debt works differently than other types of refinancing; in fact, there are two ways to do it. First, “refinance” credit card debt by transferring the balance to a new credit card with a lower interest rate. This effectively refinances that debt to a lower rate. However, borrowers should be aware that these promotional interest rates tend to expire within a relatively short period of time, such as twelve or twenty-four months, so this may not be a great long-term strategy if the debt cannot be paid off in this fixed term.
Another option is to refinance through a personal loan, also known as a debt consolidation loan. Banks and credit unions offer these types of loans, and work similarly to student loan refinancing. With such a loan, a debtor can consolidate one or more credit card debts into one personal loan. Afterwards, they are required to pay back that debt at a different (hopefully lower) interest rate and payment term.
Using a personal loan might be a better decision than using a balance transfer credit card. In today’s rising interest rate environment, you may want to lock yourself into a fixed interest rate. Balance transfer credit cards only have variable rates, whereas personal loans usually only have fixed interest rates. Fixed interest rates will not change as interest rates rise, thus locking you into a lower total loan cost and consistent monthly payment. Keep in mind that some of these loans could come with origination fees and prepayment penalties. If these are too severe, then a consolidation loan may not be worth it.
Patty Moore started blogging when she got the idea for Working Mother Life, her personal finance blog. Check it out to learn more about her journey as a single mom.