Why Is It So Difficult to Get Refinancing (Vanskelig å få Refinansiering)?

Refinancing can be an invaluable strategy for turning difficult debts into easier-to-manage loans, but that does not always mean it is an easy option. For many people, refinancing can be a surprisingly difficult service to access.

At first glance, refinancing seems like an obvious choice for anyone looking to lower their interest rate, reduce monthly payments, or shorten the term of their loan. However, the reality is that securing refinancing can be surprisingly challenging. 

But why is it so difficult to get refinancing as a debt management option? If you have been considering it yourself, then it is important to understand the reasons why lenders might be hesitant to provide it.

What is Refinancing?

If you do not already know, refinancing is the simple idea of using a new loan to pay off one or more old debts. This allows you to replace troublesome debts – like ones with high interest rates or short repayment times – with debts that are easier to manage.

For example, let’s say you have credit card debt that has been racking up a lot of interest due to a 15% interest rate and needs to be repaid in full in three months. By paying that debt with a 13% interest loan that lasts for six months, you take off a lot of the pressure.

This can also allow you to consolidate debts by taking out loans that pay off multiple debts, turning them into one new debt with a single interest rate and repayment arrangement.

This can be a very powerful move in many debt-related situations, but it is also not easily available to every person. Many lenders are very careful about who they provide refinancing loans to since these loans always involve existing debt.

Refinancing And Risk

All loans are based on risk. Lenders want to avoid taking too many huge risks with their money – in other words, they only want to lend money to people if they know they will still turn a profit in the end.

This could be because the borrower will pay the loan back with interest, but it can also be because the borrower will likely fail to repay the loan and have to give up their security. In either case, the lender turns a profit.

When you apply for refinancing, lenders evaluate your financial situation with a fine-tooth comb. Usually, people turn to refinancing to deal with existing debts, and that means that you are already presumably worried about not being able to repay them (or just want to reduce the cost).

This can mean that many people who go for refinancing are high-risk. This could be because they have higher debts that require bigger loans or just because they do not have much money or collateral that the lender would be able to take if they fail to pay back their loans.

In simpler terms, lenders hate giving money away to people who might not be profitable. The more of a risk you are, the harder it becomes to get reasonable loans – or even get a loan offer at all.

Reducing Your Risk

So, what can you do if you want to maximize your refinancing options? There are some steps you can take to reduce your risk and make yourself more likely to get the loans you want.

The first is increasing your credit score. Your credit score directly impacts the risk you pose to lenders – the higher your credit score, the less risky you are to lend to on average, and the better refinancing rates you can expect.

Increasing your credit score involves things like paying bills on time, having a steady job, and not accumulating new debt. It takes time to build up, but the higher your credit score, the better your options. This obviously makes it a long-term goal, so if you want to start refinancing sooner rather than later, you may have to settle for less favorable terms.

You can also increase your security by offering collateral. For example, if you set a house or car as collateral, the lender can seize that property if you fail to pay back the loan. This way, the lender has more of a guarantee that they will receive their money back.

Finally, you can also try to reduce your debt levels before you seek out the loan, if this is possible in your situation. For example, if you have three outstanding debts, paying one and getting a loan for the other two can give you better interest rates than getting a loan for all three.

The Role of Credit Scores in Refinancing

A credit score is a numerical representation of your creditworthiness based on your credit history. In other words, it is a measurement of how reliable you are when it comes to debts, credit, loans, and repayments.

Lenders use this score to assess the likelihood that you will repay a loan. The higher your credit score, the better your history with repaying loans and other debts – making you much less risky.

However, if your credit score is low, you may find it difficult to secure refinancing. Lenders may view you as a high-risk borrower, which could result in higher interest rates or even denial of your refinancing application.

How Credit Scores Are Calculated

Credit scores are calculated using several factors, each of which can be extremely important. These include:

1. Payment History: Your history of making payments on time. Late payments can have a substantial negative impact on your score.
2. Amounts Owed: The total amount of debt you owe across all credit accounts. High balances can lower your score, especially if you are close to your credit limits.
3. Length of Credit History: How long your credit history is. Lenders like to see a track record of responsible credit use over time, so your score will be lower if you have not been managing your own finances for very long.
4. New Credit: Opening several new credit accounts in a short period can lower your score, as it may indicate a higher risk of overextending yourself.
5. Types of Credit: A mix of different types of credit (credit cards, installment loans, etc.) can have a positive effect on your score. This shows that you are able to handle multiple loan and debt types and are not relying entirely on just one.

How to Use Security for Refinancing

Security involves putting something at risk to secure a better loan – for example, offering your car as collateral if you do not repay the loan. This can apply to refinancing, too, and can sometimes help you secure even better loan options.

The main downside is that if you can’t pay back the loan, the lender has the right to take possession of the collateral. This makes it even more important that you actually pay the loan back – but thankfully, security usually makes it much easier to get reduced interest rates and easier payment terms.

By adding security to your loan, you are taking away some of the lender’s risk and putting it onto yourself. This eases up some of the pressure on the lender and makes it much easier to get a good loan but at the cost of potentially risking your property.

Choosing the Right Collateral

When considering offering collateral, it is important to choose something that you are confident you can keep safe. Common forms of collateral include real estate, vehicles, and savings accounts. 

The value of the collateral usually has to exceed the loan amount since the lender always wants to turn a profit. However, depending on the situation, this might be up for negotiation – especially if you already have a good credit score.

However, it is crucial to remember that you are putting this asset at risk. If you are worried that you might not be able to repay the refinanced loan, then you need to consider the fact that you might lose that property.

What Else Do You Need to Know?

Refinancing is actually quite a simple idea, but it is easy to get overwhelmed if you are not sure exactly how it all works. There can be a lot of specifics that are easy to overlook at first, and a lot of details you do not actually need to know off by heart.

Many lenders across the world use refinancing, and it is not hard to find lenders that can provide it. However, it is important to treat refinancing like just another loan – use the same care and common sense when you are choosing between different options.

For example, if you are looking for Norwegian lenders to help since you får ikke betale gjelden din, make sure that you choose one you can trust. Avoid excessive interest rates unless you have literally no other options.

Refinancing is an excellent tool to have in your financial toolkit, but you want to use it carefully. It can save you from unexpected major debts and help you consolidate multiple debts into one loan, but you need to treat it as a serious commitment. Big refinancing mistakes can still really harm your finances in the long term.