Can I Refinance a Debt?

When you refinance a debt, you get a new loan and use the money to pay off the old loan. Then you get to make payments on the new loan following that lender's terms and procedures. Whether or not you can refinance depends on the specifics of your financial situation.

Creditworthiness

Lenders' guidelines for refinancing a debt are very similar to the guidelines for financing the debt in the first place. The borrower must have sufficient credit history to meet the lender's credit score requirements. Lenders also often look at the borrower's income to determine whether it can support the monthly payments, especially when refinancing a mortgage. A borrower who is not creditworthy might be asked to get a creditworthy co-signer who is willing to hold joint legal responsibility for repaying the refinanced debt.

Type of Debt

In general, lenders are reluctant to refinance a secured debt unless the asset's market value is higher than the amount of the debt that will be refinanced. Therefore, if you owe more on your house or car than it is worth, you might have a hard time finding a lender to refinance. In addition, refinancing an unsecured debt can be tricky if you have a spotty credit history because the lender might not get all of the money back. The easiest type of debt to refinance is a secured debt in which the asset is worth at least 20 percent more than the amount you are refinancing.

Costs

You typically must pay some upfront costs to refinance a debt. Most lenders charge an application fee that might be refundable if you do not qualify. Lenders also generally charge a loan origination fee that is a specific percent of the refinanced debt. In some cases, the lender for your current loan might charge a prepayment penalty if you refinance it and pay off the original loan, especially if it has not been long since you got the loan in the first place.

Benefits

There are two major reasons to refinance a debt. The first is to get a lower interest rate. If market interest rates have dropped since your first loan, you will likely get a lower rate. Plus, if your credit score has improved by making consistent on-time payments to reduce your balances, this can also help you secure a lower interest rate. The other perk of refinancing a debt is that you can extend the term of the loan to make lower payments over a longer time period. This helps relieve your budget of some stress.