Getting a college degree is one of the most significant milestones every teenager looks forward to. Buying a residential property is a dream that many young adults want to turn into reality. Thankfully, almost everyone can do these, even without enough cash. Loans provide a means to align your financial resources with your aspirations. 

Loans are crucial in maintaining liquidity, whether for personal or business purposes. They allow us to buy or do many important things without touching our savings. They are beneficial during unexpected situations, such as emergencies, layoffs, and legal matters. We saw their importance during the pandemic recession and the 2022 inflation. 

However, they can be a double-edged sword if not appropriately managed. As such, we must know our obligations and create strategies to stay financially sound while repaying loans. This article will cover loan refinancing and what drives its current boom. We will also give several savvy tips for loan repayment. 

What is loan refinancing? 

Loan refinancing has always been pivotal in maintaining a decent credit score. In a nutshell, it is the process of applying for and taking out a new loan to pay an existing loan. It covers a wide range, including personal loans, mortgage loans, auto loans, credit cards, and student loans. 

With loan refinancing, debtors can have more flexible schedules and favorable interest rates and repayment amounts. 

Right now, loan refinancing is a staple for many households and businesses as interest rates remain elevated despite the rate hike pauses since 2023. 

Strategies for Loan Repayment and Refinancing 

With interest on loans staying high today, making repayments can be challenging. Even so, there are ways to avoid getting stuck in financial quicksand. The economy is regaining strength as inflation stabilizes. These are some strategies to repay your loans quickly.

Assess your income and budget 

Prices are still higher, but inflation is tamer today. You may have already coped with inflation and adjusted your spending habits. Yet, you must still take some time to review your budget and compare it to your income. Living within your means ensures liquidity and capacity to pay loans. 

Check your monthly income and budget and apply the 50-30-20 rule to manage your finances. Suppose you are earning $4,500 a month. Half your income, or $2,250, should go to your fixed costs, such as rent, electricity, water, internet, and food. Meanwhile, 30%, or $1,350, is spent on entertainment and miscellaneous expenses. Lastly, 20% or $900 is for your savings. 

Given this, you must determine if you can deduct a portion of your savings or miscellaneous expenses to repay your borrowings. For instance, you can cook meals instead of dining in a restaurant. You may also postpone your plans or reduce your budget for new clothes. That way, you can lower your spending and allocate it to loan repayments. 

Pay borrowings religiously for a better credit score 

There are many loan refinancers out there. However, getting their approval may not be as easy as 1,2,3. You must build an excellent financial reputation through your credit score. 

You must pay your borrowings religiously, no matter how challenging it can be. That way, you will have access to more reliable lenders or refinancing. A flexible payment schedule also decreases your monthly payments and interest. 

Consequently, a lower credit score lowers your chances of getting their approval. You will also have a lower credit limit. Worse, you may find yourself trapped in subprime and predatory lenders. 

Find other income sources 

No matter how frugal you are, your current income may not be enough to meet your needs and obligations. It is high time to seek better-paying jobs to explore your potential and enhance your skills. However, the economy has not completely recovered despite improving inflation and labor market conditions. 

So, you should keep your current job. If you resign now, you may not get hired or start working immediately, leading to a longer gap between your last and next payment. 

Currently, it may be wise to look for other income sources. You can trade stocks or open a new business. You can also work freelance or part-time. These are more accessible today amid the digital revolution. You can work and earn wherever possible with your mobile phone.

Make extra loan payments 

Religiously paying your loans boosts your credit score. Yet, it can be tedious and more expensive if you only do the bare minimum. So, you must consider making extra payments to shorten your repayment duration. This strategy can make a significant change in the long run. 

Suppose you have an existing loan of $50,000 with 5% interest or $2,500 annually, and you should pay $500 monthly. After transferring the minimum required amount, $208 goes to interest, and only $292 is subtracted from the loan amount. As such, only 0.5% is deducted from the principal. 

After a year, you still have a balance of $46,496, which will increase to $48,820 after adding the 5% interest. 

If you make extra payments of $200 per month, your loan balance will only be $44,096, which will be $46,300 after adding the interest. This will give a difference of 2,520 ($48,820 – $46,300), which is higher than the annual payment of $2,400 ($200×12). Hence, it makes your repayment cheaper. 

Apply for a high-yield savings account 

As advised earlier, suppose you use the 50-30-20 rule for your $4,500 monthly income. Your monthly savings of $900 will become $10,800 after a year. If you put it in a regular savings account, it will bear an interest of about 0.5% or $54. 

But if you leave it in a high-yield savings account, it can bear about 5% APY or $540. A huge difference, right? After a year, your savings amount will become $11,340. After five years, it will become $13,784 versus $11,071 in a regular account. 

You can use your earnings to make extra loan payments or start a business to increase your income streams. 

Choose reliable loan refinancing providers 

There are plenty of refinancers out there. Each one of them guarantees a favorable payment method and schedule. However, you must know that there’s something more than meets the eye often. Beware of predatory and subprime providers. 

Check as many lenders as you can personally and on the internet. Observe all critical aspects, including their payment schedules, miscellaneous fees, and interest rates. 

Also, investigate their reputation as a loan refinancing provider. For example, you might consider SoFi’s mortgage refinance offers. They’ve been in business for over a decade and ensure borrowers’ safety and financial security. They boast a clean record to prove their reliability and can save borrowers from unwanted stress, especially when the payment week approaches.  

Also, it has a favorable payment rate. Its ten-year mortgage rate is fixed at 6.0% versus the national average of 6.6%, and a 30-year mortgage offers a rate of 6.9% versus the national average of 7.1%. 

Automate loan repayments 

Automating loan repayments through autopay can help lower interest rates. That way, a considerable portion of your monthly payment is deducted from the principal amount. This will also raise your chances of getting approved by loan refinancers to get lower fees and interest. 

Federal student loan providers give a 0.25% discount on autopay. Likewise, private creditors lower the amount deducted from your wallet, helping you save $150 annually. 

An example is SoFi, which has an APR of 3.99% for student loans versus the 4.9% national average. 

What is driving the loan refinance boom?

While loan refinancing has existed for a long time, its root cause can be traced to the 2020 pandemic. When businesses had to shut down and lay off employees, the US economy fell into a deep recession. To alleviate the situation, the Fed lowered interest rates to near-zero levels. 

This attracted borrowers and investors, particularly in the real estate market. With an influx of homebuyers, housing inventory could not meet the demand. So, in 4Q21, the median home sales price exceeded $400,000 for the first time. This slowed demand, but prices remain high today since the US is still short of at least 4M houses. 

Additionally, the mortgage rate of 6.93% is more than twice as much as in 2021. Given this, monthly mortgage repayment has become more expensive, prompting many to apply for mortgage loan refinancing.  As of April 2024, mortgage loan refinancing applications were 4% higher than in the same period in 2023. 

Student loans come second, with 43.2M Americans having federal loans to pay. Currently, the average student federal and private loan is $39,981. Meanwhile, the average amount a student must borrow to get a college degree is $32,637. 

Another driver is the 2022 inflation. After the inflation rate set a new all-time high of 9.1%, many businesses struggled to manage their costs and expenses amid softer consumer demand. Meanwhile, many private individuals touched their savings to cope with the higher prices of consumer goods. At the end of FY23, 40% of Americans depleted their pandemic-era savings. 

In addition, the Fed implemented interest rate hikes to temper inflation. It skyrocketed from 0.5% in 1Q22 to 5.5% after a year. This figure hurt many borrowers, particularly those who became heavily reliant on personal loans and credit cards due to inflation. Credit card loans ballooned to $1.1T in 1Q24. 

Currently, the inflation is more stable at 3.3%, while the Fed maintains rate hike pauses. However, it may take some time before the Fed implements its target rate cuts. With interest rates above 5%, loan refinancing is now a staple for many households and businesses. 

Takeaway

Loans are a double-edged sword for both individuals and businesses. On one hand, they provide the necessary funds to make ends meet, invest in opportunities, and acquire valuable assets. A well-managed loan can help you become more financially stable. 

On the other hand, mismanagement of loans can quickly deplete your wealth, leading to financial strain and potential bankruptcy. The burden of high interest rates and accumulating debt can be overwhelming.

Fortunately, loan refinancing offers a solution. Refinancing allows you to restructure your existing loans, often at a lower interest rate, helping you reduce monthly payments and debt burden. This process can improve your cash flow and make it easier to manage your finances. 

Additionally, successful refinancing can positively impact your credit rating—it can be easier to obtain credit in the future. By taking advantage of refinancing options, you can ensure a more stable financial future and maintain a decent credit score.