Since the financial crisis hit many people have been struggling to meet their loan repayments. This means that more people are looking for ways to increase the affordability of their loans. In these cases renegotiation with the lender or refinancing with another lender is almost inevitable, but financial institutions are becoming increasingly cagey which is making the process harder.
The most popular ways of increasing loan affordability is to refinance or extend the term of the loan. In basic terms refinancing is replacing one loan with another that has better terms and conditions. Refinancing generally happens when someone wants to reduce their interest rate, fees and/or charges. Extending the life of the loan is also available with some refinancing agreements which can allow a borrower to get their finances back on track.
The main advantages of refinancing and extending the loan term is that the loan repayments will be reduced. This allows the borrower to pay smaller amounts over a longer period of time which can be extremely helpful if the household cash flow has been reduced for some reason. The other main advantage of a long term loan is that the borrower can afford to take out a larger loan if necessary. They can also be helpful for those that need to get a loan with bad credit as the borrower is more likely to be approved because the risk to the lender is reduced.
When first considering this option the disadvantages are not always apparent. However, by extending repayment term the total interest paid over the life of the loan will be much higher than with a standard term. People who choose refinancing also need to be aware that there may be fees or charges for the early payment of the original loan.
It is important for anyone thinking about increasing the affordability of their loan to carefully consider the options. Never rush into any decisions that are going to have a large impact on your finances. In most cases it is a good idea to speak with a financial planner or credit counselor to find out the best course of action for your situation.
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