If you have a lot of debt or have taken out loans with high interest rates, this might be the article for you. Navigating the financial world can be tricky to say the least, and it feels like we’re thrust out into the world with very little preparation on this front. This leads to many of us accepting loans that have poor terms.
For those of us in this situation, we might not know where to turn or what to do. After all, it can be stressful trying to pay off all of our debts while feeling like we’re barely making a dent each month. The status of the world right now, especially the economic playing field, isn’t exactly comforting either.
So, if you’re feeling lost, remember that there are options out there. One such is refinancing, which might sound a bit intimidating but at its core, it really isn’t. Before we get into that, you may want to read more about loans in general here: https://study.com/learn/lesson/what-is-a-loan.html. Just keep in mind that it might work slightly differently depending on where you live, like in Norway.
The Basics: What is Refinancing?
Today, I’ll be discussing this term as it relates to credit agreements. When you decide to do this with an agreement you have made, it is generally because the rates for interest have changed significantly from when you made the deal in the first place. Obviously, the goal is to sign on for a lower one rather than a higher one.
This can help to save you from going further into debt. If you have loans and make payments each month, you might know how it feels to have that amount that you owe continue to go up despite your timeliness with bills. Without a lot of spare cash lying around, it’s hard to actually
The Role Interest Plays
I think it’s important to consider the role this concept plays in what we owe to lenders. There are different types of it, for example. Simple interest is about what it says on the tin – it is the amount that you pay on the principal amount, with no other strings attached. Usually, this is what accrues for a savings account, since you don’t get as much as the next type.
When it compounds, many people refer to it as “interest upon interest.” So, the amount that you owe will grow based upon not just the principal amount, but anything accrued since then as well. This is the main way that debts skyrocket, especially with poor rates.
When a lot gathers up over time, what you owe increases. Unfortunately, many lenders offer high rates, so you end up paying a lot more. For more details on that you might want to try looking at deadlinenews.co.uk – refinansiering, though there are other resources as well.
How are Rates Determined?
The key thing to remember here is that because of the free market, there are a lot of variables at play. I would say there are approximately five pillars to this. I’ll explain them now.
- The Risk Levels of the Borrower
This one is probably the largest influence. You see, when a lender offers money to someone, there is always an inherent risk they won’t receive that money back. So, they include this accruement as a form of “reward” that they get for lending.
What determines a person’s risk, though? Obviously, there are a few facets to this – it’s not a one pillar sort of issue. However, what most organizations end up looking at is your credit score. If you’re not familiar with that, it’s a show of your borrowing history and how trustworthy you are with funds.
So, if you regularly pay bills on time and don’t have a lot of outstanding debts, you will probably enjoy lower rates. On the other hand, if you have a poor history in this department, the rate will likely end up being much higher. This is part of why we are encouraged to build up a credit history as soon as we can, even if credit cards can be hard to manage.
- The State of the Economy – how Willing are People to Save?
You may not expect that this matters so much, particularly the latter half of the question, but it is quite influential. In our free markets, supply and demand regularly interact, creating fluctuations in pricing and the value of money. Where does the money come from, though?
Well, the outstanding supply of it often diminishes or increases periodically. This is due to how much people are willing to save at a given time. That includes regular consumers, but also businesses and even governments. If those bodies are investing more, the economy is probably in a sound place.
This soundness actually drives interest rates up, at least to some extent. This is largely due to the fact that during a financial boom, a lot more of us start to invest in the real estate market. That drives the rates up. The inverse is true for times of weak economies.
And so, we circle back to the inescapable fact of life that drives so many of us mad: taxation. It should come as no surprise that this plays a part in lending. Interest rates are likely to be lower when the tax situation is more favorable for lenders. You can find out more about how this works on this page, if you are curious.
This is probably a term you’ve seen a lot in the past few months, especially. It’s a huge concern for many governments and individuals right now, since the value of many paper currencies is going down while prices are rising drastically. Many necessities are quite expensive right now, including gasoline and groceries.
When this is the case, there will likely be higher rates for interest as well. This is because the spending power on currency is lower, so lenders need to compensate for that. So, this has significant influence on our loans.
- How Long the Loan Lasts
This is the final aspect I’ll discuss here that impacts how much we will accrue on our principal amounts. You see, the longer the repayment terms, the more likely that the rates will be high. The shorter, the opposite is true.
Just know this is not always the case. There are other factors at play here, and to fully understand this, I would recommend researching how bonds work – the idea is very similar to what I’ve described and can provide a bit more insight. Either way, it is probably best to look at the contract carefully before you sign on.
So…How does Refinancing Work?
If you took out your loan during a time of economic success and you find that you’re paying more than you would like to, refinancing is a potential option that you can take. The way it works is that you open a new account (usually with a different lender) and pay off the previous debt with the new funds.
This way, you are spending less money in the long-term, because the rate at which you accrue those extra fees will be lower. If it won’t be, I don’t recommend you go through the process. So, before you go through with it, some calculations will likely be necessary.
Thankfully, it is not overly difficult to do that. Consider consulting with financial experts if you are unsure how to go about it, but if you use some of the formulas to calculate simple or compounding interest, you can find out if the new rate you are being offered will actually be beneficial for you in the long run.
You may be wondering whether it is worth it and hoping I can give you a definitive answer on that. I would say that in most cases, it is. Saving cash is hardly a bad thing, and if you’re consolidating at the same time, it can save you quite a bit of pain each month trying to remember all of your different bills.
If you would end up spending more, though, the answer is likely no. Either way, you should be sure to explore the options out there for accounts that you could open. Some are specifically designed for this purpose and offer long repayment terms with low rates to help you climb out of a pit of debt.
Managing our money can be difficult like I have said, but it is a good thing that there are ways we can do it more accessibly now. Hopefully, this article has helped teach you something you didn’t know already – my goal is to spread the knowledge that I wasn’t taught in school!
If you decide to do this with your loans, I wish you the best of luck in finding the right broker for you. There are many options online, so if you aren’t sure where to start, consider there!