There is a religious quote that says “the debtor is a slave to the lender”. Other than this quote, a lot of resources online and offline have stressed the need to avoid being a debtor. This is either to a person or a financial institution.
Well, we should start by saying that all these quotes and lectures on not borrowing have a point. The reason for this includes how:
- One could end up spending more than necessary
- One would most likely end up paying (probably a lot) more than was borrowed
- The actualization of one’s financial goals can be threatened
- Assets can be lost if repayment plans do not go as planned
These are just a few of the points used to stress the need to avoid being a debtor. For more on this subject, you can read this article.
While we are not saying the points stressing the need to avoid loans do not hold water, you should know that there are exceptions. Taking out a loan is the best and wiser financial decision in some situations. This is considering how doing this at such times will do way more good.
So, you need to understand the dynamics involved in being a debtor and see if it is the right thing to do before making a decision. Clarifications on this subject just had to be made as we believe it would help you better understand this article.
This is because we will discuss loan/debt refinancing here. It is an important subject as some people got loans for worthy or unworthy causes and now have problems paying back. It is not the end of the world for such people as they can still get out of that financial mess through loan/debt refinancing.
The importance of loan refinancing will be discussed here and so you should follow through till the very end of this article. This is so that you do not miss out on important information.
What Is Loan Refinancing?
This is taking out a newer and bigger loan to take care of the problems brought about by the several loans already taken. The problems we are talking about here have to do with things such as high-interest rates, inconvenient payment plans, and a few other things.
Taking note of these problems brought about by previous loans, refinancing is not just about getting a bigger loan to clear out the debt(s). It is more importantly about ensuring that the same mistake does not repeat itself.
More often than not, the major problem with regular loans especially from financial institutions is the interest rate. At the time of applying or getting the loan, this does not seem like a problem but reality sets in afterward.
This happens when repaying is more difficult than the borrower imagined. Fortunately, a refinancing loan can serve as a good bailout plan. This is a financial structure with the ease of the borrower as the major objective.
It is used in many parts of the world to assist debtors regardless of the name it is called. For instance, it is goes by the name refinansiering av gjeld in Norway. This means “debt refinancing” and many people in Norway take advantage of it.
It is a lifesaver for them considering how Norway is one of the most expensive places to live in the world. For instance, interest rates attached to the use of credit cards in the country are often outrageous. Some people in Norway have financial nightmares to face when they do not make their credit card payments on time.
This is not a financial experience peculiar to people in Norway alone. There are people all around the world facing the same fate because of debt issues. This is why they need to understand how debt refinancing can help them out.
Does Debt Refinancing Make Sense?
Debt refinancing is a reasonable thing to do under some circumstances. This also means that there are situations in which it is not the right approach.
In other words, people need to know if it is the right thing to do. To this end, it is likely to pay off when:
There Are many Loans to Pay Off
There are many kinds of loans that people can apply for and this is thanks or no thanks to financial institutions. The idea is to enable people with purchasing power when the need arises but this is just as good as it sounds on paper.
This reason is that many of these loans come with a heavy price, especially in terms of interest rates. Other than interest rates, dealing with many loans means that you are dealing with many terms and conditions that have to be adhered to.
Truth be told, this can be a very big nightmare. There is even the possibility of defaulting not because one does not have the means but because keeping track is difficult. As a result, a structure that allows one to combine these loans in addition to other benefits is welcome. This is what you get with refinancing your loans.
The Interest Rate Is Backbreaking
We have mentioned how the interest rate problem is the major reason people opt for refinancing but this cannot be overemphasized. Various loans are designed to have the borrower pay a lot more than was borrowed because of the way the interest rate operates.
Well, refinansiering av gjeld as the Norwegians would call it is a good escape route for people with interest rate problems. The fact that online channels have made it possible to get these loans quickly is even good news.
The reason is that sluggishness means that the outrageous interest rate keeps taking effect and affecting the borrower adversely. So, refinancing a loan should not be seen as getting into another financial mess. Rather, it is a strategic means to deal with the mess already on the ground.
Your Asset Is on the Line
There are various classes of loans. As it concerns the point we are trying to establish here, you should know there are secure and unsecure loans.
The secure kind implies that the borrower has to offer up an asset(s) that would make up for his/her inability to pay when expected. The technical word for what is offered up is collateral. More often than not, the collateral is usually something that has way more value than what is lent.
People finding it difficult to pay a secure loan and facing the possibility of losing their collateral can take out a refinancing loan. By doing this, the asset used as collateral will not be lost.
Some debtors work with the mindset that taking out a refinancing loan is simply adding to their financial troubles. This is not the case. Rather, it is a system designed to save many debtors. We have gone over how this is the case here and hope that you henceforth make the right financial decisions.