What You Should Know About Refinancing with Security (Refinansiering Med Sikkerhet)

 

Refinancing is a financial process that has helped a good number of consumers to get out of debt faster. It is a process of replacing an original debt with a new one with better terms and conditions. It can either be a replacement of one debt or a consolidation of several debts. 

A consumer loan is one financial product that is getting increasingly easier to access by the day. Due to this ease, a number of people do not do their due diligence before taking out multiple loans. By doing their due diligence we mean counting the cost and putting all the variables into consideration. 

On the other hand, there are people who actually did their due diligence and everything panned out but the vagaries of life upturned their plans. In such a case, the person is left with debts that they can’t handle. 

The last set of persons is those who took out loans under an interest rate climate that seemed favorable at the time. But years down the line, they discovered that the climate has changed and interest rates are lower.  You can check out this article for more information on this. 

Every actor in all these scenarios that we have painted can benefit from refinancing. In this article, we will discuss some important factors to consider and what to do before refinancing. 

Factors to Consider and Things to do before Refinancing 

There are two ways that one can refinance a loan and they are refinancing with security and refinancing without security. Refinancing with security simply means to take out a refi loan that’s backed by collateral.  Refinancing without security on the other hand means to take out a refi loan that isn’t backed by collateral. 

Financial experts recommend that the best option is to refinance with security and we are of the same opinion too. There are some significant benefits to refinancing with security and they include the following:-

• Lower interest rates
• Longer repayment duration 
• Lower monthly payments. 

That being said, the following are factors to consider and things to do before refinancing:-

• Have a budget 
• Compare effective interest rates
• Consider the repayment period 
• Consider the security of the assets that you are putting up as collateral

Have a Budget 

It is in your best interest to draw up a budget of how you will manage your monthly payments even before you apply for a refi.  Input every fee that comes with the loan and the interest rates so that you will have a near accurate estimate of what you expect to pay monthly when you take out the loan.  After that, you input your daily living expenses and your income. This will enable you know whether you can repay the refi comfortably or it will inform the next line of action for you. 

You can do this on an excel sheet or look for online tools that you can use. 

Consider Effective Interest Rates 

This is actually a general rule for anyone taking out a loan whether fresh or refinance. This is one of the most important parameters to use in the comparison of several loan offers. The effective interest rate is the sum total of the fees, interest rate and every cost relating to the credit facility. 

If you use only nominal interest rate to make your comparison you might be in error. This is because the nominal interest rate is only the sum total of the interest that you pay; it does not include other fee. 

A loan might have a low nominal interest rate but the effective interest rate will be high. While another one may have a high nominal rate and low effective interest rate. The latter is the cheaper of both loans. So never judge the cost of a loan by the nominal interest rate. 

Consider the Repayment Period 

It is important to know that the duration for the repayment of your loan affects your monthly payment.  A loan with a 12 month repayment period will mean a higher month payment than one with a 5-year repayment period. 

Although a longer repayment period will allow you make lower monthly payments, a shorter duration is actually cheaper in the long run. 

Consider the Security of Your Asset(s)

Remember that we are talking about refinancing med sikkerhet (with security) here. This means that you have to put up your asset(s) as collateral and the asset has to be of equal value with or higher than the loan.  Also, note that the bank will foreclose on your asset in the event of a default (this means that they can sell your asset to recover their money). 

This, therefore, means that you should not just enter into a loan agreement lightly. Consider whether you can service the debt before signing on the dotted line. This also includes knowing that you can continue the payment even if the interest rate goes up. 

If you figure that you cannot comfortably make the monthly payments, it is better you seek other alternatives than run the risk of losing your asset(s).  Conversely, we feel that putting down your asset may serve as an incentive for you to work on finding ways to ensure that you don’t default on your payments. You may need to revisit your budget and move things around to make it work. 

Conclusion 

Refinancing with or without security is not an option to be taken without due consideration. Much more serious is putting down asset of equal or higher value for a credit facility.  You need to do your due diligence, even consult financial experts if need be so that you will not go from frying pan to fire in your finances. 

In this article, we have shared tips on what to put into consideration and steps you should take to ensure that you make a decision that will be in your best interest. Do not take these tips for granted, rather study them and ensure that you utilize them for the positive outcome that you desire. 

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