To refinance in financial terms means to revise or replace the terms and conditions of a credit/loan agreement that’s already in place. When someone or a business entity seeks to refinance a loan, what they are looking for include getting change that would favor them in terms of the payment schedule, interest rates and other terms that are in the contract. In the event that the proposal for refinancing is approved, the person who collected the loan would get a new set of terms and conditions in the place of the original one.
This process is also known as ‘refi’ in financial circles is sought by borrowers to help them get potential savings on the payment of their debts from the new contract. You can visit this site for more insight on the subject: https://www.investopedia.com/terms/r/refinance.asp
There are different types of refinancing and they include the following:
Rate And Term Refinancing
This is when an existing credit is paid off and replaced with a new loan contract that attracts a lower rate of interest payments.
Cash Out Refinancing
This is most common in a situation where the value of the asset used for collateral has increased. This process entails that the equity or value in the asset is exchanged for a higher amount; this loan also often comes with a higher interest rate.
What this means is that if your asset has increased in value (on paper) you can access that value through a loan instead of selling it. Although this would increase your loan amount, it would give you access to immediate cash while you retain ownership of the said asset.
Cash In Refinancing
This is a situation where the borrower pays some part of the loan so as to get a lower LTV (loan-to-value) ratio or lower monthly payments with lower rates.
This is the process by which a business or an individual gets another loan at a lower interest rate than the one they have in place. They then use the new loan obtained to pay off the old one. This now enables them to pay off the new one at a lower interest rate.
All the above that we have discussed are more prevalent with mortgage loans. In this article, however, we want to show you how to engage the process of what the Norwegians refer to as refinansiering av kredittkort (credit card refinancing). So if you live in Norway or other European countries, this would come in handy. Note also that this information is helpful even outside Europe.
What is Credit Card Refinancing?
This is the process of transferring the balance in your credit card from one lender or card to another. The sole aim of this process is to save money by paying lower interest rates on the same amount.
Is Debt Consolidation And Credit Card Refi The Same Thing?
A debt consolidation loan and credit card refi are quite similar because they both entail helping you pay off more than one debt using a personal loan
But the concept of refinancing your card(s) is all about getting a lower interest rate to enable you to be free from being indebted. Although balance transfer most often comes with low-interest rates at the beginning, these rates expire after a while and you are left to pay a higher rate on the balance of the debt.
Another factor that one also has to consider in this process of a balance transfer is the fact that there may be a transfer fee. Also, most people have been overcome by the temptation of purchasing stuff on impulse with the new card thereby accumulating more debt. So before signing up for a refi, one has to be very sure that they are disciplined enough to focus on the end goal and not be distracted along the way.
How to Refinance Your Credit Card
Now if after giving it serious thoughts, you are ready to refinance your credit card, here are ways of doing so:-
Since credit card companies do not allow that one card be used to pay off another, you can do a balance transfer from one card to another. Bear in mind that there are stipulations that you must follow to get this done. However, once you are able to carry out the transfer, you’ll have a much lower minimum that you must pay even if it is for only a percentage of your balance.
Turn It Into A Home Equity
If you own a home that has unused equity, you can explore using it to refinance the debt on your card by converting it to home equity. You can refi the mortgage on your home and then utilize the cash to pay off the balance on your card or make a substantial down payment.
You can always consult a financial adviser who would help you work out a way around this method. When you get the best one for you, you would have a lower payment rate for your mortgage rather than making multiple payments on the card on a monthly basis.
Engage A Debt Management Plan
This in essence doesn’t involve getting a new loan to pay off the old debts. Rather it helps you to manage your debts and pay it off without incurring new ones.
This process is usually engaged with the help of Not-For-Profit organizations. They help you ensure that you make your payments monthly (promptly and in full). With these organizations, you may get lower interest rates and fewer fees. But the tough thing with this plan is that your credit card account would be closed.
While this doesn’t affect your credit score negatively, it sure impedes your spending abilities; but all for your own good. This plan is actually the best for anyone desiring to get out of debt; it gives you the needed discipline and focuses to achieve your goal.
In this article, we have discussed the term refinancing broadly and then focused on how to refinance your credit card. The truth is that the information herein is not exhaustive but at least it can get you started on your journey of refinancing your credit card and bettering your finances.