Have you recently learned of refinancing and considered it a viable option for your current financial situation? The truth is that refinancing is a great choice that many people opt for due to several different reasons. This option comes with so many perks that make it such a great choice.
For instance, you can use it to become debt-free faster by getting a new loan with a shorter repayment plan or getting a lower interest rate. Some lenders may even allow you to refinance your debt without security (collateral). If you’d like to learn more about the benefits of refinancing without security, you can go here. However, this great option can end up being a bad choice when it is not done correctly.
A lot of people tend to make certain mistakes when refinancing a loan without security. Most of the time, these mistakes will leave these people in a worse financial situation than they were before refinancing. Luckily, you can avoid these mistakes by knowing them and doing the exact opposite during the process. Therefore, we will list below and discuss some of the most common mistakes to avoid when refinancing your debt without security.
Getting the Timing Wrong
Timing is a very important factor that you have to consider when you want to refinance a loan. There are certain times when refinancing isn’t the best choice, and there are times when it is. An example of when it is a bad choice is when you are almost done paying off your current loan. Sadly, a lot of people tend to make this mistake.
Refinancing your debt when you have almost paid it off is a bad choice that will cost you a lot of money. This is because of two major reasons. One, this process may come with certain fees that you’d need to pay when applying. Secondly, getting a new loan when your current one is almost due means you’ll get a longer repayment plan; this would cost you additional money on the interest rate.
Another time when it would be wrong to do this process is when the interest rate market is on the rise. This can make you trade a lower interest rate for a higher one. So, before you go through with this process, properly consider it to be sure the timing is right.
Not Shopping Around
The last thing you want to do when refinancing debt is go for the first lender you meet without finding out what others have to offer. Some people even go ahead to work with their current lender without doing their research first. We aren’t saying getting a new loan from one’s current lender isn’t good. We are simply saying that before you do so, be sure that what they are offering you is the best deal.
To get the best deal there is, you need to take your time to shop around. Compare different lenders and find out what they are offering in terms of interest rates, repayment plans, and so on. One of your major goals for refinancing should be saving money. You can only do this when you get a great deal – therefore, take your time to shop around.
Considering Only Cashback and Interest Rates
Yes, the interest rate of the new loan is one of the major things to consider when refinancing. However, it is not the only thing to consider. Sadly, a lot of people make this mistake and are often fixated on getting the best interest rate while neglecting other important factors.
Some people’s reason for refinancing is cashback. This is when the new lender gives the borrower more money than the value of their current debt. The borrower can then use the cashback to handle any other financial expenses they may have. Sadly, when some people refinance because they need cashback, all they focus on when choosing a deal is the cashback offers they get.
In such cases, the borrower can miss other important factors like the repayment plan and monthly payments. They may even forget to evaluate other additional fees in a bid to get a good cashback offer or low interest rate. All of these can make them spend more money in the long run. Therefore, when shopping around for a good deal, ensure you do a holistic evaluation to be sure you are actually getting a great deal.
Not Considering the Refinancing Costs
Some people go ahead with refinancing without taking the time to consider the costs of doing so. They may think they can handle the cost and embark on the process without being properly informed. This can make them end up putting a financial strain on themselves that they did not bargain for.
Hence, before you even take the first step of refinancing your debt, be sure that it is something you can afford. Find out the costs attached to the process, calculate them, and be sure you can afford it before you proceed. Evaluating the refinancing costs is also very important to ensure you do not end up spending more money than you saved.
As we’ve mentioned, one of the biggest benefits of this option is that it can help you save money. If its expenses are more than the money it’ll potentially save you, it is better not to forge ahead. So, even if you can afford the costs, you need also to be sure that it isn’t too much that it overshadows the benefits you are meant to enjoy.
Prolonging the Loan Term
Some people’s reason for refinancing is that they can no longer afford the monthly payment of their current debt. Hence, they need to get a new loan with a lower monthly payment. But most times, this may result in a longer loan term that will have the borrower paying more money on interest rate in the long run.
Thankfully, there is a way to avoid this. When refinancing for this reason, take your time to look for a loan that has a shorter repayment term that matches the duration of your current loan. Typically, a loan with a short repayment term should come with lower interest rates than one with a longer term. This way, you might be able to maintain a lower monthly payment without increasing your repayment duration.
Refinancing Often
Some people may refinance several times just because the interest rates keep reducing. They may think that they are saving money by doing this. But in reality, this habit would be costing them more money in the long run.
Why is this so? Well, remember the refinancing fee we mentioned when discussing the last common mistake? Every time you refinance your debt, you have to pay these fees all over again.
As though this isn’t enough, some lenders may charge a prepayment penalty each time you refinance. A prepayment penalty is a fee that a lender may charge when you want to pay off your debt before its expiration date. You can visit https://www.wallstreetmojo.com/ to learn more about the prepayment penalty. Depending on the value of your debt, this fee may be a bit steep.
Also, when you refinance often, you keep prolonging your repayment length. This means that you would be in debt for a longer period. What some people do not consider at this point is that they’d be paying interest throughout this period. This means that this move can cost you quite a lot on interest rates, thereby offsetting one of the major reasons you may have opted for this option in the first place.
Conclusion
Refinancing a debt with or without security can be a very good choice when done right. Sadly, there are a lot of mistakes that a person may make during this process that will end up costing them more money. This article has discussed some of these mistakes to help you avoid them so you can have a smooth process when you want to refinance a debt.