Having substandard credit history can be extremely dangerous in modern society with financial records being easily available to everyone, especially investors and lenders. Learning how to handle credit is not something we have been taught through our education systems, and refinancing and healing from bad credit can be a mammoth task.
However, it is not impossible. In this article, we will be talking about various ways in which you can refinance when your credit history has taken a turn for the worse.
What exactly does it mean to refinance? Essentially, refinancing entails replacing an existing loan with a fresh, new loan that ideally has a lower rate of interest, or is kinder on the borrower in terms of any of the terms and conditions relevant to the loan. Refinancing may offer several benefits like allowing an individual or a company to consolidate their debts and in some ways save money.
How to Refinance Loan With Bad Credit:
It may be pertinent to note that refinancing may not necessarily be the most strategically-wise move to make as the costs that may be incurred through the process may easily outweigh the benefits, besides lead to poorer credit and put one in a dangerous and vicious cycle of constantly further ruining one’s credit. And entering into exploitative and dangerous loan deals from creditors which officially recognized or not.
Refinancing, therefore, admittedly is a rather expensive and time-consuming, and potentially dangerous process to adopt. However, it truly can save a considerable sum of money and change the fate of a borrower from financial ruin if done strategically and with appropriate prudence.
Refinancing is undeniably harder when you have a negative credit history. When one has not shown adequate credit discipline and prudence as a borrower, any loan they receive will automatically become a high-risk investment for the creditor.
This is why they will attempt to safeguard themselves by charging higher interest. Asking for security and any other terms will hedge the risks of the credit they give a borrower.
However, all is never lost, and below we have discussed what one can do when one is looking to refinance given they have imperfect credit.
1. Talk to your Current Lender:
Given that you are a current customer, the lender, whether a bank or private party will be more likely to work with you to reach a symbiotic creditor-debtor relationship. For obvious reasons, a bank will take all possible steps to prevent your debt from turning into a Non-Performing Asset or a bad debt. So, it is best to first check with them and analyze if they have any existing program or system for refinancing when you have in some way caused detriment to your reputation as a borrower.
However, prior to approaching a bank, it is absolutely imperative that you analyze the reason you have bad credit. Any lender will analyze the reason for your bad credit, whether it an unpredictable and unlucky situation that you fell into or if you had any sort of intent that would indicate fraudulent behavior patterns.
Asking for a refinancing program is not a matter of right and is largely based on the discretion of the lender. So, if you decide to give this a shot, make sure you make your case and prepare for a negotiation.
Read More: Best Bad Credit Loans
2. Approach a Credit Union:
A credit union is essentially a species of financial institutions, which is completely controlled by the members that form it. Credit unions generally give loans at lower rates than banks or other financial institutions. Credit unions are paternal institutions by their inherent nature and will work with you in the long term to fix your financial health.
While credit unions are still not as popular in India that you will be able to find a proficient establishment. They can genuinely help those who are stuck in a vicious cycle of bad credit that only gets worse. A credit union may help you in the short term, and help you figure out and implement a long term strategy. So you can move on from the dangerous repute of being a high-risk investment for creditors.
If you have assets, it might make a lot of sense to cash them out to refinance instead of taking a fresh loan. Arguably, this is a method of taking a loan from yourself. You can potentially give a percentage of the ownership of any property you own and cash out to refinance yourself. This protects you from ruthless interest rates.
Essentially, when one has bad credit, they are likely to get stuck with an extremely expensive loan that can even potentially be exploitative. It, therefore, might make sense at this stage to refinance by cashing out your own assets. It might be an emotionally overwhelming process. But it may be the cheapest and most financially healthy option in both, the short and long term.
4. Fix your Credit:
While the options above are relevant and valid, the most important step for anybody with bad credit would be to step up and fix their credit. Cut corners to spend less, pay your bills and dues on time and in full. Pay attention to your credit score. Dispute any incorrect information that has been noted by the relevant financial institution or a credit rating agency.
Fixing your credit history is not an easy or short term process. One has to commit to fixing their financial health just as one would do for their mental or physical health. Financial experts say that one can truly completely heal from a financial breakdown within a year if one commits to being on top of their money game.
Refinancing is the best option when the state of credit one has, improves. When one takes a loan at a time when their credit is not in the best shape they get stuck with steep interest rates. Higher security and payment compliances and a tougher deal in general. Once you fix your credit, you can replace the overpriced loan and replace it with a more marked down loan.
Clearly, the long and short term solutions must co-exist and run concurrently. Being on top of your financial game stems from being prudent. Prudence is key when one is trying to create strong credit and sound financial health for oneself. We hope this article helps you step into healthier financial practices and develop a mutually beneficial relationship with your creditor.