Borrowers are forced to turn to refinancing services for a variety of living conditions. Most often, the situation looks like this: The borrower has taken out loans from several credit organizations at relatively high interest rates, but now realizes that he is unable to pay that amount every month and would like to reduce his monthly payment. The second option is that you realize that you have already taken out a lot of loans and are unlikely to give you a new one, but funds are needed.
In this case, credit consolidation with a large amount of money allows you to pay off your existing loans and get additional cash. And finally, the third most common option: you get tired of running four banks every month and you periodically forget to make timely payments because of the large number of payments. In addition, you understand that the loan was given to you on less favorable terms and would like to reduce the rate by taking out a loan aimed at refinancing with a new bank.
The essence of refinancing is the issuance of a new special purpose loan to repay old credit liabilities
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When applying for a refinancing service, you must be prepared to go through the normal procedures that every borrower must go through. In particular, it must prove its solvency. Possibly (depending on the amount of credit to be granted) – pledge or guarantors must be offered.
Refinancing involves several steps:
1. Before considering a loan consolidation option, you should find out whether there is a moratorium on early repayment of previously issued loans. If such a moratorium is in place, then it provides for penalties for early repayment. And then refinancing can prove to be extremely disadvantageous.
2. You go to the bank and explain that you want to consolidate your loans and repay them in one bank. Usually, when it comes to trusted borrowers (who have paid off their existing loans on a stable basis), the bank is happy to come to you, as it allows it to get a new solvent client with a large cash loan.
3. Once you have received a pre-approval for a refinancing loan, you select the required documents (these may be statements of existing loans, income statement, pledge documents), and apply to the bank for credit.
4. The bank gives you funds to repay your loans. In most cases, the credit organization itself transfers the funds to your accounts with other banks to pay off your loans. Sometimes cash is issued and you need to show your bank the documents for canceling your past credits.
Refinancing and debt restructuring – which is better?
The essence of restructuring is not the granting of a new loan to cover the old, but the change of the maturity and repayment schedule of an existing loan. The procedure looks like this: You write an application to your bank explaining why you cannot make the previous repayment according to the previous schedule and request an extension of the credit. Remember that the debt consolidation procedure is better first and foremost for your credit history.
Because when a borrower applies for debt restructuring, it is a signal to the bank that the debtor has lost his ability to pay and is no longer able to deal with his credit obligations. Credit consolidation is much more frequent and the fact that you are applying for this service will not negatively affect your credit history. In addition, in the case of loan consolidation, your counterparty changes most often, so you can choose the bank that suits you best, and change your servicing credit organization.
When is Refinancing Used?
The main tasks of this type of lending are:
- monthly payments reduction;
- receiving additional funds;
- loan rate reduction;
- time and nervous savings thanks to paying only one credit, not several.
Before applying for credit, think about the pros and cons of this event. Pay attention to the difference between interest rates on old loans and new loans: to be profitable, the difference should be 2-3 percent. Also, read the documents carefully and check that you will not be charged a penalty for early repayment. Also check out the new bank’s offer – see what the deductions are for credit, what the new bank offers in terms of payment schedule and deadlines.
The credit consolidation procedure can become a real “rescue call” for many situations in life. If you are laid off and realize that you will not be able to ‘pull off’ your previous payments in the next few months. If for some reason you have lost your ability to pay, you should not hesitate to deal with this problem, as dealing with bank debt recovery procedures is not the most enjoyable measure. It’s much better to come to the bank yourself and keep your reputation.
It is important to understand refinancing options. There are 3 main options:
1. You can reduce your monthly payment by taking out a loan for a much longer period of time. For example, the previous loans had a maturity of one year and the new one had a maturity of three years. In this case, your total overpayment will increase.
2. You can reduce the overpayment by taking a loan at the same maturity but with a lower interest rate, and you will not have to pay for using the loan with multiple banks (you will now only be able to pay one amount and only one bank).
3. You can receive additional funds without increasing your monthly payment. In this case, you’ll need to get a new credit for an amount greater than your original credit.