Many people take loans to consolidate or refinance old debt. This happens often because these people take multiple small loans. For some, they fell into multiple credit card debts.
In either case, consolidating the loan is the best way to get an overall lower cost. Therefore, in this article, we will reveal what you need to know about consolidation or refinancing loans. We’ll also share tips you can implement to reduce costs. If you’re ready, let’s begin.
Calculating the Amount You Will Save by Consolidating Debts
Before you think of applying for a consolidation loan, you need to carry out this step. Why is this important? Well, the whole idea of refinancing is to help you save money and have a single debt. So, if you end up paying more than what you currently owe after consolidating, then it wasn’t necessary in the first place.
To calculate the potential amount you’ll save, create an overview of the current fees and interest you’re paying. If you cannot calculate it yourself, you can visit https://besterefinansiering.no/samlelån/ to find a loan calculator. Apart from discovering how much you’ll save; the overview will enable you to prioritize your debts. This is helpful in case you don’t secure a loan that can cover all your debt.
The possible cost of a refinance loan depends on:
- Each debt item’s interest.
- Cost of each debt item.
- Repayment period remaining on each debt item.
With this information, you can determine if taking a refinance loan is worth it and helpful.
Getting the Best Consolidation Loan Terms
The best way to secure a refinance loan with the best terms is to receive multiple loan offers. To do this, all you need to do is apply to several banks. Alternatively, you can hire a professional loan broker.
Using a broker makes the process easier, and they’ll get more offers than you could have managed yourself. Moreover, you’ll save yourself the stress and time. Another reason to use a broker is that some banks offer better terms when a broker applies on behalf of a client.
Consolidation Loan Interests
When you apply for unsecured credit to refinance your debts, the interest rate you’ll get depends on your creditworthiness. The bank will assess your credit to determine whether you are creditworthy or not, which is a function of your credit score. If your credit score is high, the interest rate will be low. On the other hand, if the credit score is low, you’ll get a high interest rate.
In addition, the amount you apply for affects the interest rate you get. If you apply for a huge amount, it will lead to a lower interest rate. Consequently, a small amount equals a higher interest rate. Also, bear in mind that the effective interest rate varies depending on the details such as the establishment fee and installment payments.
The Loan Example
Most banks always provide a loan example aka interest example. You’ll find the amount you want to borrow, the repayment period, the effective interest rate, and the overall cost. Some banks provide this example just beneath their loan calculator. Others provide figures for several credit amounts.
Don’t pay much attention to these figures as they are never a true indication of the offer you’ll receive. Instead, regard them as indicative, as they are just illustrations of the average rates of current customers. You can only accurately assess your offer when you apply.
Prioritize the Largest Debts
As we said earlier, one of the advantages of creating an overview of your current debts is to help you prioritize the debt to repay. This is important because in many cases, you might not get a credit that will cover all your debts. Therefore, you need to deal with those debts with the highest cost, and then continue settling the debts based on their costs until you’ve exhausted the money.
It’s important to mention that taking a refinance credit for debts you can easily and quickly clear makes no sense. For instance, if you owe NOK 2,000 as debt on credit cards, you have no business refinancing. This amount can be paid off easily.
Rules for General Loans
When you want to refinance, there are rules you must follow. These rules are laid down by the Norwegian Financial Supervisory Authority and all banks are mandated to comply with these guidelines. Let’s outline these rules that guide credit approval:
- No bank is permitted to offer you a credit that will put you in debt that is five times higher than your income per annum.
- You must have the repayment ability to the point that a 5% increase on the interest rate on all your debts won’t put you into financial difficulty.
- The maximum repayment duration for an unsecured credit must not exceed five years.
- The lender must consider your survival necessity which means they must consider your living expenses and determine whether the credit will affect your quality of life.
The above guidelines can be disregarded by the bank if you are borrowing money to refinance. This means that securing a refinance credit is easier than securing a consumer credit. Furthermore, when you consolidate, the repayment period can be extended beyond five years. However, you’ll have to settle the existing debts within the agreed repayment periods.
Tips to Reduce Loan Costs
The purpose of refinancing is to reduce costs. Therefore, with a good offer, you’ll automatically reduce costs. Yet, you can cut costs some more when you follow the tips below:
- Carefully compare different offers.
- Apply with your partner or spouse as a co-borrower.
- Select a short repayment period, provided you can meet up with the repayment.
- Pay additional installments whenever you can, but confirm that you won’t pay additional fees for doing so.
Conclusion
Consolidation loans allow you to combine most of your current debts into one single debt at better terms than the collective debts. In the article above, we’ve discussed what you need to know about this type of credit. We also shared some tips on how to cut costs during the application process as well as the credit duration.
