Thursday, December 4, 2008

Credit Repair Skills - How Much Interest Can Refinance Loans Save You?

You need to understand that loans affect your credit score more than almost any other item on your credit report. The types of loans you have, the term of your loan you have, the outstanding balance you owe and most importantly your credit history are the key criteria which impacts most on your credit score. By starting to manage your outstanding loans, you are on the road to a cleaner credit report. Here are some easy loan management tips you could act on.

Refinancing Your Loans

Let us take for instance that you have taken up a home or car loan when interest rates were high. You will find that you are paying a proportionately higher interest repayment amount compared to your principal amount. If you have maintained a reasonably good credit rating or have improved on it, you may consider refinancing your loan. Refinancing your loan essentially means that you are taking up a new loan with another banker or lender by redeeming the old loan. Oftentimes, clients refinance their loans when there is obvious disparity with the interest rate charges of the old loan compared to the new loan. Refinancing a loan could greatly help you save interest payments you might be currently incurring with the old loan which is pegged at much higher rates. A three to four percentage point difference would cause a incremental of USD1000 or more per month conservatively. It is hence not difficult to visualize the eventual impact on your personal financial plan. Let us draw the example that you have taken a 20 year long term fixed rate loan. You could be losing out on USD240000 over the term of the loan for having bad credit rating. Or conversely you might be saving USD240000 for simply having good credit rating. This is not even calculating the annualized compounded effect of interest savings rolled over the 20 years.

Not Advisable To Refinance Loans Too Often

Firstly, by refinancing your loans less often allows you to develop long term relationships with your lenders or bankers. This is due to the fact that when you bring your loan to another new lender, the financial fact finding activities that the new lender needs to execute on your credit report gives rise to a good number of inquiries, thereby affecting your credit score temporarily. However, take for instance the above example, if you feel that in doing so, it can actually help you repay your debts much better and save a good amount of interest expenses, you should proceed with the loan refinancing. In addition, if by making your payments more affordable, you can eventually salvage your credit score, refinancing is a good approach. For example, if you can get more reasonable monthly bills that you will actually be able to repay, refinancing can help prevent all those non-payment credit dings that come from not being able to pay your bills.

The Long And Short Effects of Loan Refinancing

You should be forewarned though that in the short term, refinancing could cause a dip in your credit score as you will incur a lot of inquiries on your credit report by your new lender and also due to the process of opening a new account and closing the old. The long term effect is, however, very beneficial to boosting your credit score, as you will now have lower installment amounts to repay and hence able to channel the money saved back to the new loan accounts.For more good reads on Credit Repair, do visit my website.

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