5 reasons not to refinance your loans
When you are feeling the pressure of debt, it can be tempting to grasp for solutions that sound like they will eliminate your debt. While there are instances where refinancing could be appropriate, for most people a refinance loan is not a good idea. Learn more in today’s blog.
The pressure that debt creates on many people can make them think that there is no hope. When you feel that way, solutions that may not be the best for you can appear to be the solution that you are looking for. Consider these 5 reasons not to refinance your loans.
1. Refinancing gives you a false sense of security
Refinancing often provides a false sense of security. A loan does not change what or how much you owe. You still owe the same amount of money that you did before you got the loan. Only now, you owe more because you actually borrowed more than you owe. You also signed up for transaction fees and perhaps an increased interest rate over a longer period of time.
Initially, your payments may be smaller, but that means that you will be paying the loan longer. You will also pay more interest because you are paying less on the principal of the note than you were paying before you refinanced. Having debt for a longer time makes you less secure instead of more secure.
2. Refinancing doesn’t solve your problem
You may think that your problem with debt is related to your payments. If that were the case, refinancing could be a solution. But the real problem is that you owe money to a lender. In many cases, the money that you owe is related to something that you don’t even have any more.
In addition to debt, the other issue that refinancing doesn’t solve is spending. When you spend more than you bring in, you go into debt. No matter what debt “solution” you try, if you don’t address your spending issue, you will never get out of debt. Reduce your spending and eliminate your debt.
3. Refinancing costs you more money
When you refinance your debts, there are additional costs that you need to consider. By reducing the amount of your payments, you are paying the loan off over a longer period of time. You are paying interest on a larger balance every month. You pay more interest because the balance is higher. The length of time to pay off the note has increased. You pay interest longer.
Had you kept the original payoff schedule, you would pay more principal every month, lowering the amount of interest you pay every month. There can also be loan fees that you have to pay to secure your loan. All these interest charges and fees add up. The result is more money for the lender and less for you.
4. Refinancing keeps you in debt longer
With your reduced payment, you are paying the principal on your loan at a slower rate than before you refinanced. It takes you longer to pay off the principal on the loan. That keeps you in debt longer.
When you reduce the amount of your payment, that does not reduce the amount of interest that is due on the loan each month.
Let’s say you were paying $100 on a loan, with $40 going against the principal and $60 against the interest. If you refinanced the loan with the same loan terms, but a payment of $75, you would save $25 on your monthly payment. But you would still be paying $60 per month on the interest. That would only leave $15 a month to pay down the principal!
The payment went down 25%, but the amount going against the principal went down 62.5%. That is a lot to give up. If you want to get out of debt, that is not the way to do it,
5. You can pay the loan off yourself
What the lender doesn’t want you to know is that you can do this without them. Instead of making the payment smaller, tighten up your spending and put MORE money on the payment. This does just the opposite of refinancing and reducing the payment. More money goes against the principal and less is needed to pay the interest. The principal balance goes down faster. You pay less interest and the loan is paid off sooner.
The lender makes less money. You can see why they don’t want you to know about this.
Put the pressure on debt instead of letting debt pressure you. Quit borrowing money. Reduce your spending and pay off your debt. You will be glad you did!
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1. Refinancing means borrowing more than you owe today.
2. Many people still owe money on items they no longer have or use.
3. Paying more on your principal balance is smarter than paying to refinance a loan. Here's why:
4. Refinancing actually keeps you in debt longer.
5. Refinancing your debt can actually cause you to pay LESS principal on your loan than what you were paying before you refinanced.
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