Refinancing existing debt has become a popular financial strategy over the last several decades. The idea behind it is to save money and improve the family budget by using more affordable financing options to retire other debts that are costing too much money. The key to successfully employing this strategy is to understand refinance rates and how these affect your financial position.
When we talk about ‘refinance rates’ we are simply referring to the combination of interest and bank fees associated with borrowing. As you know, borrowing money is not free. You pay for that privilege in order to provide some profit to the lender. The important thing is to make a concerted effort to ensure you are not paying more than you have to. You do this by paying attention to all the costs associated with borrowing – this includes annual percentage rates (APR), lender charges, and associated fees.
The combination of interest, fees, and charges is known in the industry as the 'total cost of borrowing'. This number is the most important number of all for determining whether to refinance existing debt or not. Knowing the total cost of borrowing and how this fits in to your financial strategy is critical to making wise borrowing decisions.
Standard Interest and Representative APR
Understanding refinance rates starts by understanding the difference between standard interest and representative APR. Standard interest is expressed as an annual percentage rate (APR) applied over the life of the loan. Therefore, a secured loan with an APR of 6% would charge a 6% interest on the outstanding balance over a 12-month period. Dividing that number by 12 shows the consumer is paying 0.5% per month on the outstanding balance.
How is this different from representative APR? A representative APR is an estimated number that combines both the standard APR and all of the known costs of borrowing. When you obtain a secured loan, there will be a number of fees and charges rolled into the amount you borrow. There are administration fees, valuation fees, etc. There is even a fee to enter the second charge on your home.
As you expect, the representative APR is always higher than the standard APR. Yet it still represents a fairly accurate estimate of how much you will pay over the life of a secured loan in order to borrow. This is critical in understanding whether or not refinancing existing debt with a secured loan is a wise financial decision.
Secured Loans vs Refinance Mortgages
Back in the late 1990s and early 2000s, banks were pushing hard to convince consumers to refinance existing debt by refinancing their mortgages. They proposed a simple strategy: take advantage of equity by getting a new mortgage that would pay off your existing mortgage and give you extra money to consolidate high interest debts such as credit cards and personal loans. The deal was made more attractive by escalating home prices that seemed to have nowhere to go but up. However, let us compare a refinancing mortgage with a secured loan in terms of refinance rates.
When you obtain a new mortgage as a refinancing tool, you are essentially starting over with your house. Not only are you obtaining money to pay off existing debts, you are also putting the entire value of your home back on the financing block for 30 years. In terms of refinancing rates, you might be saving money on a month-to-month basis, but you'll likely end up spending more because you have turned back the clock and obtained a new mortgage that will take 30 years to pay off. A secured loan is different.
A secured loan enables you to borrow against the equity in your property. Yet in doing so, you are not erasing all of the mortgage payments you have made thus far, as you would by refinancing your entire home. The lower refinance rates offered by secured loans still allow you to pay off high interest debts while keeping to your original schedule of paying off your house. Most people who use the secured loan end up spending less in the long term than those who refinance their mortgages. Terms make a big difference in the total cost of borrowing.
Refinance Rates versus Terms
Refinance rates are also critical when looked at in relation to loan terms. What is a loan term? It is the amount of time you have to pay off your secured loan. A typical secured loan these days can be taken for terms of 10, 15, 25, or 30 years.
It is important not to take loan terms too lightly if you want the maximum financial advantage of refinancing with a secured loan. This is made clear by doing some simple maths.
Let's say you borrow £25,000 at a refinance rate of 5% for 30 years. Your total repayment would work out to just over £48,300. Your monthly payments would be about £134. Now let us assume the same amount of money at 7% for 15 years. Your total repayment amount would be about £40,400; your monthly payment would be approximately £224.
You can see the slightly higher interest rate for the shorter term costs more on a month-to-month basis. Nevertheless, it also saves you about £8,000 over the life of the loan. You have to ask yourself whether the lower monthly payment is more important than the total cost of borrowing. Is it worth it to pay an extra £8,000 just to have the lower monthly payment?
Keep in mind that we are talking about using a secured loan to refinance existing debt. You might be considering such a strategy because your current high interest debts are putting too much strain on your monthly budget. If that is the case, getting the lower monthly payment might be critical regardless of how much money you end up spending over 30 years. For the same reason, the higher monthly payment that comes with shorter terms may still be more affordable than what you are paying now on all of your high interest debts.
In a nutshell, refinance rates are not everything. These have to be compared against loan terms before you make a decision.
Think before You Borrow
Secured loans are great financial tools for those who own property with equity. It is rarely a bad idea to use a secured loan to refinance existing debt, as long as refinance rates and terms are attractive. Nonetheless, do not just assume every secured loan is worthwhile. Think before you borrow.
Secured Loan Expert advises consumers to take the time to understand how refinance rates affect borrowing decisions. We offer a lot of helpful information on our website to get you started. We hope you will take advantage of that information along with asking others about their own experiences. Of course, you should compare secured loans from multiple lenders as well.
The more you know about secured loans and refinance rates, the better prepared you will be to make a wise financial decision. The combination of a wise decision and a sound financial strategy could drastically change your personal financial picture for the better. That is one of the reasons we are so enthusiastic about secured loans for refinancing.
If you need help with any aspect of refinance our expert team of friendly advisers offer their professional advice for free. Our team will find you the best offers available from a whole of market panel of top uk lenders, compare them side by side, ensure you are full aware of all costs for each individual offer and when you are happy with any lender deal create and submit an optimised application ensuring that your case is reviewed in the best possible light.
Just call us today for free impartial advice – we work for you not the lenders.
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- Borrow up to £2,500,000 Depending on the Equity in Your House.
- Adjustable Repayment Terms from 3 to 30 years.
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