Do you want to group several debts or improve the conditions of a loan that you have in force? Here we explain how refinancing of credits works and what products you can contract to pay a lower monthly fee or get a more attractive interest rate.
What is refinancing a loan?
When we talk about the refinancing of debts and other loans we refer to the fact of asking for a new loan with different conditions to obtain certain improvements, such as a lower interest rate, a longer term (and lower fees) or a greater capital. In general, refinancing can be requested for two different purposes: either to reunify debts or to improve the conditions of a current loan. Let’s see what each modality consists of.
Refinancing to group debts
In this case, the payday loan consolidation https://www.paydayloanhelpers.com/ consists of hiring a loan that allows us to cancel each of our loans and pay a single monthly payment. In this way, we will have to pay a smaller amount of money per month, because we will not have to face the cost of each loan separately. In general, when refinancing several debts, a longer period is usually requested in order to be able to pay the installments comfortably, which implies having to pay a greater amount in interest. Therefore, this financial instrument should only be used as a last resort.
Refinancing to improve the conditions of a loan
On the other hand, when we talk about refinancing a loan, we can refer to two actions: either to change the conditions of the product after a negotiation with the entity or to contract a new loan to cancel the current one and obtain the desired improvement. The objective of this refinancing is usually to obtain a more attractive interest rate, obtain an extension of the principal of the credit or extend the repayment term to pay a smaller monthly payment.
Requirements to get a refinance
Obviously, no bank will grant us a refinancing if we do not meet its solvency requirements and do not meet basic conditions. These may vary depending on the entity we go to, but in general, we will always be required to do the following:
- Have a regular and stable source of income. In order to obtain the refinancing, in the vast majority of cases, we will have to show that we collect enough income to face the payment of the installments without problems.
- Provide some kind of guarantee. No entity will refinance our debts if we do not provide a guarantee. This can be personal, mortgage, pignoritic, etc. In addition, in some cases it is possible that they require us to have a third person behind us, that is, a guarantor.
- Do not appear in files of defaulters. The banks will not grant us a refinancing if we have a non-payment recorded in a delinquency list as ASNEF. If we have any outstanding debt, we will have no choice but to go to a financial intermediary or a private equity company.
We must keep in mind that refinancing one or several loans can be quite complicated, especially if we go to a traditional bank. If we want to group our debts, they could deny our request if our volume of debt is very high, while if we resort to refinancing because we want to improve the conditions of a current loan, we will be required to have a proven solvency.
Refinancing a loan has a cost
Another aspect that must be taken into account is that to obtain a refinancing it is usually necessary to face several associated costs. Let’s see which are the most common:
- The penalty for early cancellation of debts: if we take out a loan to cancel one or more loans, in some cases we will have to pay the so-called compensation for early repayment. If the canceled products are personal loans, the commission can not exceed 1% (or 0.5% if one year or less remains for the expiration).
- Commissions for opening and studying the new loan: many banks will charge us the formalization and study expenses when granting us the loan that we use for the refinancing.
- Commission for modification of the conditions of the contract: on the other hand, if we choose to change the conditions of a current loan, it is possible that they charge us a commission for modifying the terms and conditions of the contract.
- Possible linking expenses: if the entity that grants us the refinancing requires us to contract other associated products, we must add the cost of each one to the final price of the contracted loan.
- Possible notary expenses: there is also the possibility that the bank forces us to formalize the contract of the new loan before a notary. In this case, the professional’s fees will be paid by us.
In addition, if we resort to the refinancing of one or more loans to pay a lower fee, this will involve extending the repayment term. Therefore, as interest will accrue for a longer time, the amount of money that we will have to pay to fully repay the credit will be higher.
Does it come to account to reunify debts?
As we have seen, the reunification of loans can be very useful in certain circumstances, since it allows grouping several credits to pay a single installment. However, using refinancing in this way also entails having to end up paying a greater amount of money in interest, because when paying a single, smaller monthly payment, the repayment term is significantly prolonged and interest is accrued for a longer time. That is why it is only advisable to resort to the refinancing of debts if it is practically impossible to face them separately. In addition, as is logical, before grouping our credits it is essential that we are sure that we can pay the resulting monthly payment, otherwise we could lose the good or goods contributed as collateral.
What steps to follow in the refinancing of debts?
Getting a refinance of debts can be a laborious process that requires a lot of patience. Even so, to have a generic idea of how this process usually works, we will now break down the main steps:
- Analysis: we must carefully observe the number of our debts and where the higher one comes from. It is advisable that we go, first, to the entity in which we have the largest debt.
- Negotiation: once we know where the largest debt comes from, we must negotiate with the entity such a refinancing. If this is not possible, the next step will be to try it with the following entities. If we still do not get it, the third option would be to look for a loan entity that is not part of our debts and verify if we fit into the profile. There are entities that offer us the possibility of refinancing our debts without changing banks and without linked products.
- Cancellation: once we get the reunification, the entity will automatically cancel the loans that we have pending.
- Inclusion: finally, the entity will offer us the credit with the conditions that, previously, we have considered to be the most suitable for our financial profile.
As we can see, the most exhaustive part of the process belongs to the negotiation. Even so, all the entities with which we want to agree on refinancing will tell us almost immediately if it is possible to do it or not, so we can discard them immediately.