How to refinance your personal loans in 2020?

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Refinance your loans

Overdue loan payments force borrowers to take the most unthinkable steps just to avoid taking responsibility for their debt obligations. Usually this turns into a constant avoidance of communication with representatives of the lender and reckless acts to change the place of residence. None of the above mentioned is an effective way to solve the problem. The most correct approach is consent to bilateral dialogue, as a result of which a compromise solution will be determined. One of the ways to avoid problems and find much-needed help is to refinance debt.

What is debt refinancing?

Basically, refinancing a loan means taking out a loan to pay off a previous debt. This service can be used at the bank that originally provided financing or at some other credit institution.

So, in what cases can a person think "I need to refinance my debts" in Spain?

  • The country has experienced economic changes that have had a negative impact on the financial system;
  • The actions of third parties have shaken the stability of an individual's income or the availability of savings;
  • The financial situation has changed significantly (loss of job and / or savings) and the amount of monthly payments is too high for a borrower;
  • A person discovered for himself a lender that offers more accessible terms for a loan.

The decision to refinance debts is made in each case individually. The specialists of the financial institution study the applicant's case in detail and, on request, offer an optimal way out of the situation.

To apply for a personal loan refinancing from external banks, one may need insurance issued by a reputable insurance company. Also, expect the process of obtaining a new loan agreement to take a long time.

The main functions of refinancing loans

Sometimes a private investment company or lender can offer people a much more attractive alternative, saving them a few euros. This creditor will be responsible for refinancing previous debts and creating a new loan with new terms and conditions. In general, refinancing credit card debt or any other existing loan allows:

  • Having a monthly payment, the amount of which is cheaper than what a person has been paying so far for his many loans.
  • Extend the repayment period to reduce the size of the commission each month and simplify your payment.

However, an individual must be prepared for an increase in the interest rate. It is logical because when the maturity increases, even if the interest is lower, ultimately, more will be paid to refinance the credit card or any other type of credit, since they must be paid over a longer period of time.

Types of refinancing loans

There are 3 types of debt reunification loans:

  1. Novation: change of conditions in the current bank. The possible changes open to negotiation are the term and the commission or even the interest rate that people pay. In case of making changes to the current loan, the person must take into account the fee for changing the contract.
  2. Subrogation: change of legal entity (the creditor) to obtain better conditions. Credit subrogation consists of changing current financing from one institution to another: banks to refinance debts. The main reason for subrogation is to improve the terms of an existing loan.
  3. Reunion - Combine multiple loans into one. This allows a person to pay only one monthly payment instead of several. Also, by having the opportunity to choose a new term, a person can extend it to pay a lower monthly fee than at present. There is a debt reunification simulator for the convenience of borrowers.

Debt reunification

Debt refinancing is another financial product that allows you to combine multiple loans into one. In this case, all the debts of a borrower are combined in one period.

This financial decision is very interesting when at any time a person accumulates an excess of monthly payments to pay each month. Usually one can join an existing mortgage, car loan, credit card payment, and personal loan. As a result, people cannot make ends meet, because the amount of debt exceeds their economic opportunities to some extent.

In these cases, a good way to avoid default is to talk to a credit institution and combine all the debts into one, to request the reunification of the debt. The usual practice is to go to the lender with whom the borrower has the highest debt to arrange a new loan, which is, in essence, a debt reunification loan.

Debt reunification with default costs

Debt reunification is not cheap. Although this is a very suitable alternative if people cannot meet the conditions of all their loans. In addition to interest, there are a number of expenses that a person must also cover in these cases. The most common are the following, although it all depends on the lender.

  • Fee for early cancellation of loans. To collect debts from a new product, one must pay off previous loans. This is generally associated with an early termination fee.
  • Intermediate agency rates. If the reunification of the debt with credit association is to be achieved through an intermediary company, the work performed must be paid for. In the case of banks, additional fees are generally charged for debt reunification.
  • Opening of a new mortgage. Very often, when gathering debts, borrowers have a mortgage among their loans. This mortgage must be paid in advance and a new one will need to be opened. Which means recovering all the costs associated with opening a mortgage: the tax on documented legal acts, the expenses of an agency, the notary public or the property valuation.

How is refinancing in 2020?

How to refinance debts? There are lenders that directly offer specific products to refinance credit. In practice, any financial institution can provide a loan to a borrower to pay off an existing one if their credit score is good. Of course, the proposed conditions will depend on the risk criteria of each bank and the characteristics of its products. For example, Younited Credit (alternative financing platform) offers a 5.75% NIR percentage, Banco Mediolanum offers an initial percentage of Euribor plus 7%, BBVA applies a fixed rate of 7.20% NIR.

about the author

Maria Solis Burley

Credit consultant in Spain. Financial Analyst at Crédito Victoria.
LAST UPDATED: February 3, 2020