There are always two sides in everything. When there is good, we can naturally assume that there are bad things also. Same is true for refinancing. Refinancing deals are so much better than our old loans. The deals that we can get to refinance our existing loans could be too tempting to turn down. However, we need to understand that it also comes with a downside. But first, let’s talk about the advantages of refinancing your small loan, also known as refinansiering av gjeld.
The Good in Refinancing
Refinancing terms are usually always better than the terms of your existing loan. Interest rates could be significantly lower than your current interest rate. Now you may wonder why other banks could afford to offer you lower interest rates than your existing bank. This could be due to a number of reasons. For one thing, they have incurred lesser costs in acquiring your loan. Your existing bank had to do an extensive background check before they could allow you your loan. Also, they may have incurred costs in appraising the value of your land or chattel for mortgage and chattel loans respectively. Another reason why banks could offer you a lower interest rate is because you are considered a less risky asset. Why can you be considered as a less risky asset? You already have a history of regular payments made. So you have proven your capacity and willingness to pay. For other loans that have no history yet with their clients, it could go either way.
The term offered of the refinanced loan could also be shorter than your previous loan. This is good for borrowers because they will be able to pay off their loan faster and could be free of obligation at an earlier date. Or it could be an earlier opportunity for you to avail of a new loan for some other purpose.
The Bad in Refinancing
While refinanced loan terms may seem so tempting, you also have to be careful in considering them. There may be repercussions from your existing loan that will make it a bad idea to go for the new loan. Usually, when we end our loans earlier than the agreed due date, we will have to pay some fee to terminate our existing loans. Most of the time, the rates for charges that we do not normally incur are high. So rate for penalties for non-payment and late payment is normally high as well as pre-termination fees. This is to discourage borrowers from ending their loans early to go for other loans. The banks would suffer loss of their clients as well as loss on the interest income they will be earning.
Also there may be times when you refinance your loan that you will be able to get cash-out promos. As great as having extra cash available, you may end up with a higher loan amount which could result, even though the interest rate is lower and the term of the loan is shorter, to a higher amortization. It could be tolerable if the amortization of the loan is still something that you can afford. But it may prove too much.
So when you do get an offer to refinance your loan, consider first the good and the bad in refinancing. This can help you decide whether it is a good idea to refinance or not.