One of the more common reasons individuals take out loans is to refinance. The reason this approach is common these days is because of the different pending loans and debts they might have accumulated over the years. With refinancing, individuals can pay off their debts at lower costs, thereby saving money in the process. In this article, we’ll provide you with a detailed guide to consolidation loans, popularly known as refinance loans, and how you can cut costs through them.
Calculating the Amount You Can Save through Consolidation Loan
With consolidation credit, you can save money. To determine how much money can be saved, you need to create an overview of the fees and interest rates. You can visit besterefinansiering.no/samlelån to learn more about bank loan fees and interest rates. Creating this overview will also enable you to decide which debt to prioritize. This will prove important when the amount you’re offered doesn’t cover all your current debts.
The amount you can save when you take a consolidation credit depends on the following:
- The effective interest rate of each loan item.
- The loan amount for each debt.
- The repayment period left on each loan.
Once you’ve gotten an overview, you need to compare the offers you get from different banks. This will help you secure the best offer. If you’re interested in securing the best loan terms, continue reading.
How to Secure the Best Consolidation Loan Terms
Securing the best terms means finding the offer that has the lowest interest rates and fees. To achieve this, you must get offers from several lenders. There are two ways to get these offers.
First of all, you can apply yourself. You’ll have to apply to several individual banks. If you choose this option, it might be challenging and time-consuming for you.
The second option is to apply through a loan broker. With this option, the process is easier and faster since the application process is done by the broker. Furthermore, they can get better offers than you would since they are partners with these lenders.
Consolidation Loan Interest
Just like any other credit type, apart from paying back the main loan amount, you also have to pay the interest. If you apply for a refinance credit without collateral, which is the more common option, the interest rates are usually higher than if you refinance with collateral. The interest rate you receive is based on your creditworthiness. The more creditworthy you are, the lower the interest rate.
The amount you apply for will also influence the rates. In most cases, if you apply for a large amount, the interest rate will be lower. For instance, if the amount is between NOK 50,000 and NOK 100,000, the interest rate can be between 13% and 20%. On the other hand, if the amount is between NOK 300,000 and NOK 500,000, the interest rate can be between 5% and 9%.
Another influence on the effective interest rate is the number of repayments you have to make. The longer the repayment period, the lower the interest rate. So, lenders consider your creditworthiness, the loan amount, and the repayment period when calculating your interest rate.
Consolidation Loan Example
When you apply for this type of credit, the bank is obliged to show you what is called a loan example, aka interest example. In this example, you’ll find the loan amount, overall amount, repayment period, and effective interest rate. These figures are not the exact interest rate you’ll be charged; they only show the bank’s average interest rates given to current customers.
Give Priority to the Largest Debt When You Refinance
There’s no guarantee that you’ll get the amount you applied for. That means you might not be given the amount that can cover all your existing debts. In such a case, you need to decide on which loan to refinance.
We always recommend that you give priority to the largest debt. By largest debt, we mean all fees and rates have been calculated, and the debt ends up being the largest. This overall calculation is important because some debts might have a large principal but low interest. When compared to another debt with a smaller principal but higher interest, you’ll discover the former to be larger than the latter.
Why should you prioritize the largest debt? It’s simple logic: you need help settling those larger debts, and that’s the purpose of refinancing. The debts that you can easily pay off later on shouldn’t be included in the refinance.
General Loan Guidelines that can be Disregarded when you Refinance
When you decide to take out this credit, there are rules you need to know. The Norwegian Financial Supervisory Authority is the body that enforces certain guidelines that guide lenders. When you take out a regular consumer loan, these lenders ensure that the following guidelines are adhered to:
- The lender is not permitted to present an offer with an amount that is five times bigger than your income per year. You can check here to learn the difference between annual income and annual salary. This shows that your income per year affects your capacity to secure loans.
- The borrower has what it takes to repay the loan, even if all your debts have an additional 5% increase.
- The lender, before they loan the money, must account for the applicant’s living expenses, which include insurance, food, rent, etc.
While the above is applicable when taking out a consumer credit, lenders can choose to disregard the guidelines above when you take out a credit to refinance. Looking at it from this point of view, it can be said that it is easier to secure a consolidation credit than a consumer credit. When you refinance, the repayment period can extend beyond 5 years, which is the maximum period for consumer credit. However, the period won’t extend beyond the current debt’s repayment duration.
Borrow for Refinancing Only
A common mistake that many people make in trying to play a fast one on the banks is to use the money for refinancing other consumer goods. The purpose of a refinance credit is to help you settle most (if not all) of your debts. Therefore, when you go ahead and use it for other purposes, it is no longer a refinance credit. As such, the lender has every right to treat the debt as a regular consumer credit instead of a refinance credit.
Tips to Cut costs
The refinancing process and objectives prove that it is a tool used to cut costs. With better terms, you get to pay less compared to the fees and rates of your current debts. While this is the main area most people know about, which they take advantage of, there are other ways to cut costs. This might be during the application process or after you’ve received the funds, and it’s time for repayment. If you’re wondering how to cut costs when refinancing, below are some easy tips:
Compare Offers
Carefully compare the several offers to discover the cheapest offer. Don’t be in a haste to apply for what you think is the cheapest, as there might still be a cheaper offer. Only make your choice when you’ve received all the offers you are expecting.
Co-borrow with your Partner or Spouse
Another amazing way to cut costs is to refinance with your partner or spouse as a co-borrower. This method of applying means that your partner or spouse is acting as a sort of guarantor. As a result of this, the loan will be granted and the rates will be more favorable because the bank can hold your partner liable if you default.
Go for Short Repayment Duration
A long repayment period means lower interest rates but a higher overall cost. You can cut down on this by selecting a short repayment period as you can pay. Although the interest rate might be higher, you’ll save money on the overall cost.
Make Additional Installments
Apart from your regular repayments, it’s advisable to make additional installments. This should be done when you have additional funds and is not something you need to stress over. However, before you do this, ensure that you let the bank know your plans before you make any installment payments.
Conclusion
When you take out a consolidation credit, it means you’re combining several debts into one large one. The good thing about this credit is that it allows you to save money over time. In the article above, we’ve provided a detailed guide to consolidation loans and how you can save money through them.