Refinancing – it’s a buzzword that we’re hearing a lot more of lately, and you might be wondering why. Maybe it seems like a scam – a lot of credit agreements right now sure feel that way given the state of the economy across the world. I know I haven’t exactly felt like borrowing a lot of money, because of the debt I’ve already accumulated throughout my life.
Now, while people in the United States often having crippling debts from student loans, this isn’t the case around the world. In places like Norway or Denmark, for example, generally this isn’t a huge worry. That doesn’t mean that no one takes out loans, there – in fact, it’s a large part of running a business.
Unfortunately, the state of the economy plays a large role in the terms for our agreements. If you’re not entirely certain what that means or how that works, be sure to stick around today. I’ll explain why it matters so much and if you should consider refinancing to get you back on monetary track.
What is a Loan?
It might seem a bit silly to get so basic in this article today, but I think it’s important that we cover all the bases. They are a sum of money that you borrow from a financial institution, usually a bank but there are other lenders out there. A common trend lately has been to borrow from online creditors, though there are risks that come with this.
How does it work? There are a few facets that come into play, so I’ll start with the easiest to understand: principal. This is the initial amount that you are borrowing.
Next, there is interest. This is what a lender charges a borrower, and it is paid alongside the other amounts. It is generally calculated in percentages, and there are two different types: compound and simple. I would recommend you learn about them – one resource you could use is here: https://www.investopedia.com/terms/r/refinance.asp.
The “term” of your agreement is how long it will last. This generally includes how much time you will have to pay it off. There are a few different categories again. If it’s a year or less, it is considered short term, while longer that is a long-term agreement. There are pros and cons to each, so consider it carefully before you decide to borrow.
Finally, you should know what a payment amount is. That is how much you owe each month and comes as a bill. It does include both the principal and the interest, so be sure to keep that in mind as you proceed.
What is Refinancing?
Now we’ll get to the main topic at hand, which is what this is and how it works. You see, it is when you open a new account with better contractual terms than your prior ones. Then, you utilize the funds from the new loan to pay off the old one.
On its face, this might seem odd. Why would we want to take out another one and potentially increase our debts? Well, because you are using the new funds to pay off the previous principal and interest, you will be saving yourself some money. This is mostly the case if your new terms are more generous, so be sure to study them closely.
If you’re not sure where to start, you could try reading Vafo refinansiering or consult with a professional for assistance with crunching numbers. This process does vary depending on where you live in the world, so do keep that in the back of your mind as you start it. There are several things that go into how your terms will be calculated.
What Separates a Poor Agreement from a Good One?
One of the greatest challenges we experience is sorting out whether a new contract will in fact be better than our previous one. That is partially because of how little education we are provided in schooling for this sort of thing – I felt very unprepared as I entered adulthood. Where do we even begin to start?
I would say understanding what is involved in a loan contract should probably come first. There are a few things you should keep an eye out for, because it could be the difference between a legitimate benefit plan or a rip-off.
First, ensure that there is zero ambiguity or uncertainty in the verbiage. All the details should be spelled out clearly so that there is a definitive understanding between both parties involved. You shouldn’t need to question every single line.
This also helps you ensure that changes won’t be made throughout the term of your borrowing. This is one reason to examine everything closely. If your lender tries to raise the fees, you can point back to the paperwork.
In that way, it serves as your proof. There should always be something, be it physical paperwork or a digital receipt, that provides proof of the deal. This is to protect yourself and the broker.
The Information Included
While the list I provide here will be extensive, it is not all-inclusive. There are probably things missing, so don’t take this as official financial advice. Rather, I’m just trying to offer you some baseline knowledge on the topic.
Obviously, the details of both the lender and the borrower should be included. Regarding the borrower (it could be an individual or a business), all contact information should be provided. Often, a copy of photo ID will be requested as well.
If you have a co-signer or other form of guarantor, their details will also be required. The specific terms surrounding their involvement should also be outlined.
After that comes the actual transactional information. So, whatever funds are being lent out are listed along with the terms. So, the length of time that you have for repayment, the interest rate, the monthly payment plan, and the principal amount are all included.
Finally, if it is applicable, and requirements for collateral will be shown. Today, this is usually only necessary for business transactions, but it does apply to some individuals as well. The collateral serves as a form of insurance for the lender.
Additional Things to Keep in Mind
Within a contract, there will obviously be a variety of clauses. One that irks many borrowers is the penalty for early repayment. On its face, it does seem to be a senseless money grab, but if you look at it from the point of view of the lender, you can understand it more.
When you agree to a long-term repayment plan, your lender is expecting to gain revenue from the interest accrued on your account for that entire time period. So, if you are intending to pay off the debt over a period of fifteen years, but you pay it off after six, they end up losing nine years’ worth of profit.
Obviously, that is a considerable figure. So, to recoup some of that, there will likely be a charge for this early end to the credit agreement. While it does seem unreasonable, there are legitimate purposes that motivate its existence.
Should You Refinance?
At the end of the day, this is a personal decision that you have to make on your own (or with your spouse, when applicable). However, if you have a poor agreement right now and are paying a lot of interest on your loan, it certainly may be something you want to consider. Take a look at what the rates are like right now and take that into account before you make a firm decision.
Do your best to calculate if you would benefit from the change. There are whole accounts dedicated to this purpose, and they usually offer bonuses or low interest rates if you are using them to refinance a prior loan. So, you could take advantage of those deals if you’re a savvy consumer!
What you do with your money and finances is definitely something that rests on most of our shoulders. It can be stressful, knowing how much weighs on these choices that we make. Thankfully, there are resources out there that can ease the burden and make life just a bit simpler.
I hope that you’ve gained some new insights by reading this article about what this process is and what it entails. You might be able to get a much better interest rate if you do your research!
