Refinancing can be an intimidating concept, and this is an option that many people are unaware of. For those who are struggling with high credit card debt, you should get a lower interest rate with the help of the right lender so you can get out of debt fast.
The process of taking out a new loan to pay off existing debt is called refinancing. By doing this, you can secure lower rates, consolidate everything, and save money in the long term. Here are some things that you need to know about the process.
What is Credit Card Refinancing?
Interest rates are lower than before, and many consumers would want to make their situations more favorable. On paper, a 15% interest might be ideal for a while until you hear a friend getting the 0% APR promo to pay off a chunk of loans.
The truth is that the 15% is actually on the lower end of the spectrum. The average can range from 16% to 30%. It can even be more for people with lower credit ratings, and those with 20% APR or more should consider re-evaluating their situations.
The delinquency rates have hit an all-time high in 2020 since the borrowers struggle to keep paying even the minimum due. This means that millions of people out there have an extraordinary amount of debt and don’t have a clear plan on how to repay everything. If you find yourself in the same situation, the good news is there’s hope. Some of your options are the following:
- Getting a Home Equity Line of Credit
- 401k plan loans
- Accepting the consolidation offered by online lenders, credit unions, and banks
- Creating a debt management plan
- Balance transfers on credit cards
When you refinance, you essentially trade your old debt for a new one with different terms. For example, if you have a $10,000 balance on a credit card with an 18% interest rate, you could get a 0% APR on a balance transfer card that will enable you to pay the principal faster. The savings that you can get can be enormous, so this is an opportunity that you should take advantage of.
However, there are a few things to keep in mind before you refinance. It’s best to understand the terms of the new loan and compare them to your current one and make sure the refinanced amount has better terms before proceeding. Also, it’s worth noting that refinancing will extend the length of your loan, which means you’ll end up paying more overall. Only refinance if you’re confident you can commit to making regular payments and paying off the entire sum in the new term.
How Does this Work?
Some people would apply for a new credit card with a lower interest rate or get offers for 0% APR that can be used for a set period. The new card can pay off the balance from the old loan, and the payments are going to the latter until the borrowed amount is settled.
With the consolidation process, the lender will have an amount prepared that’s large enough to cover the credit card balance. This is also a consumer debt where people apply because of the incentive that the new loan application will have better terms than the old one.
What about the Balance Transfer Option?
Some companies or banks offer transfer rates that are at 0% so they can attract new customers. These great offers will keep their clients happy for a long time, which is why the new ones don’t have to pay interest for a specific period.
However, when refinancing, know that transfer fees are about 1% to 6% of the total amount owed. You can click here to learn about your options when it comes to transferring your loans to a new one. An introductory period can last from 12 to 24 months, giving ample time for people to pay an interest-free debt. When the time is up, the rates of the APR can be 15% to 30%, depending on the borrower’s credit score and other factors.
When the balance is not paid in full or if one doesn’t put a dent in the amount owed, then the interest rates keep piling up. Some might even find themselves applying for refinancing again after a year or so. It’s important not to make any unnecessary purchases with a new credit card. When you buy a new phone for $600, know there will be interest charged. Stick to a debit card or cash transactions when purchasing something new since you only apply for a 0% APR card to get out of debt in the first place.
Debt consolidation can slash the APR by several points, and this is where many people can pay a single financing institution each month instead of multiple lenders. The non-profit or loan consolidation is available for borrowers with a decent income, good borrowing history, and a manageable debt-to-income ratio.
Non-profit consolidation types generally place the loan in one pool. This agency will act as a middleman between the borrower and the creditor. Some agencies will agree with the card companies in reducing the interest rates so they will be lower than 10%. This will result in a more affordable monthly payment.
Agencies are the ones that will take out the payment and make sure that the funds go to each of the credit card companies at the right time. This is a clear way out for people who don’t want to make extra purchases and want a clearer way out. After the process is over, the borrower is going to be free from debt. Know that this will only make sense when one’s score is high enough, and the reasonable rates offered.
Is this the Right Option for You?
There are many reasons why people refinance, but the most common cause is to get a lower interest rate. Refinancing can help you pay off the outstanding balance faster and save money on interest if you have credit card debt that takes a very long time to pay.
Other reasons people refinance include consolidating debt, getting cash out for home improvements, or paying off a balloon mortgage. Before you decide to refinance, make sure you understand all of the costs involved. You will need to pay closing costs on your new loan, and your new monthly payments may be higher than your current payments. Make sure you compare rates and terms from several lenders before purchasing a new credit card.
How to Do This?
If you’re looking to get a new loan to pay off your credit card, there are a few things you’ll need to do. The first step is to find a lender who is willing to give you a credit card with favorable terms. This may require some shopping around, but finding a deal with a low-interest rate and manageable monthly payments is important.
After you find a bank or a credit union, you’ll need to fill out an application and provide any required documentation. Once approved, you’ll receive the proceeds in a lump sum and use them to pay off your credit card balance in full. After that, you’ll be responsible for making monthly payments on your new loan account according to the terms of your agreement.
Refinancing can be a great way to save money on interest and get out of debt faster. However, shopping around for the best loan terms is important, and make sure you can afford the monthly payments before proceeding.
Pros and Cons
There are many reasons to refinance, but there are also a few potential drawbacks. Before you make the decision, it’s important to understand both the pros and cons.
The biggest advantage of refinancing is that it can save you money. If you can get a lower interest rate on your new loan than what you’re currently paying, you’ll save money over the life of the loan. Refinancing can also help you pay off your balances from multiple lenders faster, especially if you choose a loan with a shorter term.
Another benefit of refinancing is that it can give you some breathing room in your budget. If you’re struggling to make your monthly payments, refinancing at a lower interest rate can reduce your payment amount and give you some relief where you can use the extra funds to buy groceries, pay utilities, and more.
However, there are also some potential downsides to refinancing. One is that it can extend the length of time it takes you to pay off your debt. If you have a five-year loan and refinance into a new six-year term, you’ll still be paying off your debt six years from now.
Additionally, refinancing typically involves closing costs of up to several hundred dollars. If you think the extra costs are not worth it or you don’t save enough money in interest to offset the closing costs, refinancing may not be right for you.
Overall, refinancing is a great way to get out from under the weight of credit card debt and save money in the long run. By shopping around for a new loan, you can find one with better terms that will allow you to reduce your monthly payments and pay off your debt faster. As always, it’s important to do your research before making any decisions so that you know exactly what type of loan will work best for your situation. With the right plan in place, refinancing can make getting back on track financially much easier.