Recently, loan refinancing has been a very popular topic. Interest rates for the last year have reached a historic low and current loans are significantly cheaper than older loans. However, care must be taken not to get burned when refinancing.
Is it possible and worthwhile to refinance your old loan?
First and foremost, you need to know if your old loan can be refinanced . Most loans repaid in the last 5 years already have the option of early repayment, but the older ones may not offer such “convenience” in every case.
Even if you can repay the old debt early, you need to recalculate very well whether it will pay off . For example, if you only have less than 1 year to repay, it will most likely not pay off, regardless of whether or not there are any fees associated with early payment .
If the remaining maturity is longer than 12 months , you need to find out how much you would have to pay for the outstanding principal. Write down this number very well , as comparing the amount of the remaining installments with other values will be very important when calculating the comparison of alternatives.
Learn how consolidating loans can save you from trouble.
Fees for early repayment of the loan and for furnishing a new one
Loan refinancing is basically associated with two types of fees. The first is the fee for early repayment of the loan . Although today’s new loans are provided with the provision that their possible early repayment will be without penalty, this has not been the case in the past.
Make sure that the loan you are going to refinance can be repaid without penalty or extra charge. If this is not possible, you must include the amount of this penalty as the cost of early repayment . If it’s possible, it’s only good for you, but you still haven’t won completely.
You have to take into account the second type of fee and that is the fee for arranging the loan. If you catch the action during the borrowing season, it is very likely that you will not have to pay a fee for the new loan when refinancing.
Both banks and non-bank companies try to entice clients to special offers on refinancing loans free of charge, but they do not offer such an advantage throughout the year. If you have to pay the fee, it must also be included in the refinancing cost.
Pay attention to the conditions of the new loan
Because the goal of refinancing is either to save on a monthly payment or to reduce loan repayments, many people focus on one goal in isolation . At the same time, they forget to address the refinancing conditions comprehensively.
Focus on the interest rate first. The old loans had significantly higher interest rates than they do now, so don’t be “fooled” into just a tempting-looking monthly payment . Providers must provide examples of installments in their ads, but that doesn’t mean you should pay the most attention to these values.
Pay particular attention to:
- the interest rate to be expressed as a percentage per annum, ie% and.
- the value of RPMN , ie the annual percentage rate of charge, where all the costs related to the loan are already incorporated, ie not only interest
- the maturity of the loan , where longer repayment automatically means more repayment, as the principal decreases more slowly and you pay more interest
- loan repayment insurance , which some banks or non-banknotes are very happy to “add” to loans automatically
How do you know if refinancing really pays off?
You’ll need to use a calculator and a few numbers to find out if refinancing your loan really pays off. As we mentioned at the outset, you need to calculate how much you have to repay on the loan if you decide to repay the loan early. It is therefore the amount of the outstanding principal calculated by the provider of the original loan.
The second important number is the amount you will save if you decide to refinance the original loan. This amount is the difference between the repayments of the new loan and the old loan . It is then necessary to deduct from it, for complete accuracy, all costs associated with the early repayment of the old loan, or even with the provision of a new loan for refinancing.