Most consumers go into debt at some point, whether it's to take advantage of the convenience of a credit card or to get a mortgage to buy a home. But too much debt can be a serous problem, threatening your ability to pay your bills and putting your property and savings at risk. Refinancing is one solution within the ability of most consumers to arrange and it is widely available.
How it Works
Refinancing a debt involves getting a new loan to replace it. While replacing a loan with another loan might seem counterproductive, it can actually save a great deal of money. Refinancing debt may give you access to a lower interest rate than what you're currently paying. It can also extend the amount of time you have to pay off your debt, reducing your monthly payments but projecting them further into the future. Refinancing also eliminates the late fees and collection efforts of your lenders and gives you a new loan with a fresh start.
Debts You Can Refinance
Refinancing is available for several different types of debts. Mortgages are among the most commonly refinanced debts, in part because they last for so many years and borrowers have more time to find better options. Auto loans and credit cards are also subject to refinancing. Student loan refinancing involves several options for borrowers including income-based repayment plans from the federal government. Businesses can also refinance their debt to free up cash for other purposes such as expanding payroll.
Expense
Refinancing isn't free and borrowers need to understand the costs before deciding whether it's a good idea. In some cases you'll need to pay to get out of your old loan. Mortgages often include prepayment penalties to make up for the lost interest your lender experiences when you close the loan early. Prepayment penalties can also apply to auto loans. Besides shedding your old mortgage, there are the costs associated with a new loan, including closing costs and administrative fees. If you go through a broker your refinancing will carry the added cost of the broker's commission.
Sources and Options
Before you seriously consider refinancing, contact your current lender. Lenders can reduce your interest rates, forgive late fees and make other changes that will make it easier for you to repay your loan without refinancing. In the case of a mortgage this is known as mortgage modification, and it's a good first step before taking more drastic action. If you do decide to refinance, the same lenders that provide mortgages, auto loans and other types of loans are the most common refinancing sources. For credit cards you can contact a credit counseling agency, which will help with consolidating or refinancing your credit card debt for a fee.
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