The term refinance is usually synonymous with mortgages, considering that there’s a ton of articles and publicity around mortgage refinancing. However, in this article we focus on how to refinance your bad debts.
But first, what is Refinancing?
In simple terms, refinancing is the process of borrowing to repay what was previously borrowed. It involves replacing an existing loan with a new one that comes with better terms that save you money, possibly a better interest rate.
If you are currently in a situation that puts you in bad debts, there are different options you have to take yourself out of the situation. Generally, the aim is to get a lower interest rate that would gradually help ease the principal and save you some cash. Let’s consider some of your options
1. The Traditional Method
This is the regular method of refinancing whereby you try to get a new loan either from your current lender or from a new lender. This would involve you needing to discuss with loan officers about their offers and the potential costs of the process.
A note of caution though – You have to be extremely careful when choosing lenders especially if you’re looking at getting a new one. Some of these lenders have recently been known to be fraudulent, always seeking ways to exploit clients with bad credit. The wise course to tread would thus be to run a background check on any lender first so as to prevent scams.
Some of the factors that your new lender might consider before taking you on might include:
- Low debt-to-income ratio
- Low loan-to-value ratio
- Having spent a period of at least 5 consecutive years at your current employer
- A healthy Income Statements
- Good savings
One Final Tip – Always remember that when considering your refinancing options, whatever you decide should be one with a fixed rate rather than one with a variable rate. That way you can ensure that your monthly payments will be consistent as it adds a bit of certainty to your budget and makes planning easier.
2. Credit Card Option
This is another common way to refinance your debts by doing a balance transfer which simply refers to you transferring the balance rom one of your credit card to another, normally to one that has the lowest interest rate. Some credit cards even have a zero interest rate although for a limited time or a balance transfer fee (which might often be dependent on the amount being transferred). If you’re able to get such a deal on your credit card, you can actually use that credit card to refinance other higher-interest debts.
If you intend to take this option, be sure to check your card contract details, read the terms carefully and in full and ensure that after repeated calculations, you are sure that a balance transfer will save you money. Feel free to use an unsecured personal financial loan from an online loan provider like Bugis Credit to consolidate credit card or any other sorts of debts.
3. Consolidation
This method requires you to request that all your debts should be merged into one loan with a single monthly payment rather than you making multiple minimal payments on all of the debts.
This option helps to lower your overall monthly payments and depending on the existing debts, it might even lower your total interest rate and overall interest payments.
4. Reviewing your Credit Score
In the end, the probability of you getting a loan to refinance your bad debts is higher if you have a higher credit score. Of course we know that this might already be tainted by your bad debts, but there’s still hope. Take a sizable amount of your time to review your report in a bid to ascertain what might be the main issue that’s hurting your credit. Once this has been done, take steps to resolve those issues that you’ve identified.
Sometimes there might be mistakes in your credit report from your lender. If this is so, of course, you should promptly contact any of such lenders and resolve that mistake with them. There should be a forum where the accuracy of each item on your report can be disputed.
But sometimes, there might be no mistakes whatsoever and the report is as valid as can be. For you to increase your chances to get a new loan, you might to consider improving the timeframe between when you make your monthly payments. Always making your monthly payments late is a bad sign that most lenders do not ignore. Another tip could be to pay down all your credit card debt to at least 15% of your credit limit.
5. Consider a Credit Union
The major advantage that comes with most credit unions is that they are very considerate with their customers as they are mostly more focused on building relationships when compared to the banks.
So if you are a member of a credit union, you might want to consider visiting them and discussing the possibility of them refinancing your debts. They are more likely to indulge you regardless of your credit score especially if you have been a longstanding customer as they’d be willing to keep a good relationship going.
6. The Co-Signer Trap
Most times, we do not realize that having a co-signer or co-applicant on our loans might actually result in a higher rate and increased fees. And it’s not as though, having a co-signer because he/she has an excellent credit would even boost your chances of getting a loan or one with better rates. Hence, if there is someone else acting as a co-signer, it might be a smart move to have them removed as this would more likely help you get a better deal when you refinance.
The Downside
While the above options might be hassle-free, they are not completely devoid of disadvantages, for example, most lenders having sensed your desperation might pressure you into taking a loan with variable rates, meaning that your payments might either rise or fall based on the current market rates. This is a very risky measure that might leave you in more debts than you were in the beginning. Other lenders might include an origination fee for taking out a new loan and this could take out whatever savings you had in mind when considering refinancing.
Finally
Carefully consider your options. Do not be in a rush or be overly desperate. Calmly read all the terms and/or conditions placed before you in writing so that you’re sure you’re completely in agreement with everything that’s involved. Compare the rates and overall payments on your current debts with any option you’re currently considering and be sure that there is a sizeable amount to be saved. If unsure, find a loan advisor to assist with any issue you might have.
