The Cost of Money – Why You Should Refinance Your Debt

Summary: If you currently have debt there are ways to make it less expensive. Today we will discuss why you should refinance your debt.<br> Refinance: The Simple Definition<br> Just to make sure we’re all on the same page from the start, let’s define what it means to refinance a loan. Refinancing is replacing a previous loan with a new loan – ideally one with a lower interest rate and better terms. (Otherwise, why would you bother to refinance a loan at all?)<br> When you refinance, your previous loan is paid off, a 2nd (better-for-you) loan is created, and you’ll enjoy <a href="https://www.listenmoneymatters.com/go/evenfinancial/">refinancing benefits</a> like a reduced monthly payment, lower interest rate or a shorter or longer loan duration.<br> Why Should I Refinance a Loan?<br> You should refinance a loan because it will save you money. Nothing more complicated than that. In most cases, refinancing won’t make you money, but it will save you money.<br> If you have a high-interest rate debt, credit card debt, for instance, you can take out a loan with a lower interest rate, from a company like <a href="https://www.listenmoneymatters.com/go/lending-club/">Lending Club</a>, to pay it off.<br> When you refinance, you still owe money to someone, but now at a lower rate of interest. You’re losing less money and <a href="https://www.listenmoneymatters.com/how-to-get-out-of-debt/">paying off the debt faster</a> when you refinance for a better rate. Look carefully at the refinancing terms of the new lender.<br> While their interest rate may be lower than what you’re currently paying, there may be fees involved that would eat up those savings. We can’t stress this enough – pay close attention to any fees related to a refinance. Any gains you make in improved refinancing rates can easily be canceled out if you’re side-swiped by fees.<br> Inflation: What To Consider When You Refinance<br> <br> Inflation is simply a general increase in prices and a fall in the purchasing power of money. Your dollar that is worth $1 today will not be worth $1 a year from now. It will be worthless. What you needed $100 to buy this year you will need $102 to buy next year with an inflation rate of 2%.<br> That sounds bad, but inflation is not always a bad thing. Any debt you have also decreased in value as inflation grows. So your money decreases in value but so does your debt. Inflation makes your debt cheaper.<br> Automatic cost of living raises are largely a thing of the past. They were raises that matched the rate of inflation. If inflation was 2%, you got a 2% rise in order to preserve the buying power of your salary. You might get more than that, but you could count on at least a cost of living to raise each year.<br> The average raise for 2016 was projected to be 3.1% so just above inflation. If you aren’t getting at least a 2% raise, you are losing money.<br> Before the 2008 crash, inflation was pretty reliably about 3%. Since 2008 it’s been about 2%. The Central Bank’s goal is to keep inflation at about <a href="https://www.federalreserve.gov/faqs/economy_14400.htm">2%</a>.<br> Having some low-level inflation means the economy is less likely to experience deflation when economic conditions weaken. It’s meant to be a safety valve when things go south. So again, inflation is not always a bad thing.<br> The Cost of Money<br> When you take out a loan for a home, a car, or college, the lender gives you an interest rate. That interest rate is the cost to get that money. If you borrow $100 for a year at 4% interest, that $100 cost you $4. With that $100, you made $108 through an investment. The bank gets $4, and you get $4.<br> If you charged $100 for a television on a credit card at 20% interest, that money cost you $20. You didn’t make any money, that money only cost you money. And this is a key concept to grasp when thinking about...