Getting Out of a Bad Loan (refinancing)
There are so many articles online that talk about getting a loan, or being approved for a loan, with or without bad credit, but very few posts provide information on how to get out of a bad loan.
A bad loan is one that has a balloon payment on the horizon, or it carries and interest rate that’s to high or there are high fees for the services provided or they restrict you from making extra payments. Once you realize that there may be better deals available and have done some calling around, maybe browsing around at various online loan web sites and are convinced you can refinance the loan you have, then it’s time to start asking for quotes for loans.
If it’s a mortgage home loan that you want to refinance, you will be dealing with penalties for paying out the loan sooner than the term expiration date. This is why banks penalize for early pay outs – they want to discourage you from doing exactly what we’re talking about here – getting rid of their high interest loan and going to a different lender or bank. In effect when you pay out a high interest loan, the lender is losing interest income that they would have received had you stayed with the loan. The penalty is usually equivalent to the interest that you would have paid.
Basically the bank who gives the borrower the note likes it the way it was originally provided. This is the reality of banking, and seems unfair to some, but this is how they make their billions of dollars even when the interest rates drop across the board. When they are not making big money on mortgages and loans when the rates a low, they are still raking it in from the mortgages and loans that millions of Americans are stuck in without any real chance of getting out.
From the banks perspective, their clients have signed a contract and they expect you to live up to this contract. In most loans and mortgage documents there are provisions to get out of the loan or mortgage, however this usually means paying a penalty of some kind. It is interesting to note that if you wanted to pay out a low interest loan when rates have risen, they will jump at the chance because they can then relend this money at a higher rate. If you have extra money and plan to repay a low interest loan or mortgage in this situation, always negotiate to remove any penalty that there might be in this kind of situation.
Technically these are not bad loans or bad lenders they are just bad from the borrower’s perspective. Any time you are paying more interest than you should be they potentially fall into the bad loan category.
How to Get out of Bad Loans
The first step is review your mortgage documents and take the time to understand the details, particularly the repayment options and fine print. Next give your lender a call and discuss the options about repayment of your loan. They may take any one of several positions depending on current market conditions and it will be up to you to assess these positions and select the one that is best for you the client. You may also want to try and negotiate better terms as well for the offer that is closest to your requirements.
Options could include:
- Repay the loan with the penalties described in the loan documents
- Repay the loan with conditions (e.g. no penalties provided that you re-borrow from them)
- Repay the loan with no penalties (They want the money to relend at higher rates)
- Other options based on your situation and market conditions
Each of these options provides an opportunity to negotiate a better deal and also to assess whether it is even worth your while to get rid of the bad loan or mortgage. Depending on the penalties and new loan arrangements, getting rid of bad loans might also not be the best approach.
If you are confused about any of the terms and conditions, ask for an explanation from the lender and perhaps also ask for a second opinion from another lender who is interested in your business. Most lenders will be more than willing to help you with the expectation that they will somehow obtain your business based in the offers they provide to you and the advice they are also providing about getting rid of bad loans.