Refinancing | Check Meaning & Benefits of Loan Refinancing


Loan Refinancing - Basic Definition

Refinancing involves replacing an existing loan with a new loan that has better terms, such as a lower interest rate or improved repayment structure.

Loan refinancing may also, under certain circumstances, allow the extension of the loan repayment tenure, in turn reducing the monthly repayment amount to be paid. However, spreading out the outstanding amount over more months will increase the total amount paid due to the accumulation of more interest.

KEY TAKEAWAYS

  • You may opt for loan refinancing if you are struggling to repay your outstanding loan amount.
  • It allows the you to better manage your repayment schedule with revised interest rates, a better payment structure and overall improved loan terms.
  • Refinancing of loan involves the extra step of re-evaluation of a business or your repayment and credit status.

How to Refinance a Loan?

Before you refinance a loan, make sure that you know the crucial information like the new interest rates and the terms of the loan which are applicable. Also, it makes sense to opt for loan refinancing if you are sure you will benefit from it. When applying for the refinance, make sure to check your credit score as it will help you get access to lower interest rates.

Here is a step-by-step guide to loan refinancing:

  • Step 1: Calculate how much you need to borrow and avoid requesting more than you require to steer clear of added debt.
  • Step 2: Consult with your current lender before opting for loan financing. It is worth seeing whether you can strike a better deal with your current lender.
  • Step 3: Compare the interest rates, tenure and other terms offered by different lending institutions to choose the most suitable one that aligns with your financial goals.
  • Step 4: Make sure you have a good credit score before applying. It will help you have a better chance of getting approved.
  • Step 5: You can apply for the new loan online on the lender’s website or app. Once you have filled out the loan application form online with all the relevant details and attached the necessary documents, the team will verify and assess your application. If your application is approved, one of the representatives will get in touch with you to communicate all the important details. Once you have been approved, the loan amount will be instantly disbursed into your bank account.

Reasons for Refinancing a Loan

Here are the reasons why you should refinance a loan :

  • Lower Interest Rates: Lending institutions may offer lower interest rates under certain circumstances. For example, if your credit score has improved since the time, you first opted for the loan, you can now unlock lower interest rates with your boosted creditworthiness. Plus, changes in the government regulations, allow for lower interest rates.
  • Shorter Loan Tenure: If you have enough funds, you can opt for loan refinancing to quicken the repayment process. Choose a shorter tenure period and save money on interest.
  • Fixed vs. Variable Interest Rates: You can choose fixed interest rates that remain the same throughout the loan period, rather than variable interest rates that may increase based on economic conditions.
  • Reducing High EMI Amount: If you are unable to keep up with the monthly payment amounts, loan refinancing is worth considering. Opt for lower interest rates or a longer repayment term so your monthly payable amount is reduced.

Pros and Cons of Loan Refinancing

Here are the pros and cons associated with refinancing:

Pros

  • Opt for lower monthly repayment amounts with an improved credit score.
  • Switch from variable interest rates to fixed interest rates for loans, to stay on track and have more control of your monthly payable amount.
  • Opt for a shorter repayment term to save money by paying interest for a shorter duration.

Cons

  • Your credit score may take a hit as your new lender will initiate a hard credit check to decide whether to approve your new loan request.
  • If you choose to have lower monthly payments for your loan, the remaining amount will be divided into more months. However, this means that you will have to pay more interest due to the longer loan term, as the lenders calculate the interest amount every month.
  • You may face a prepayment penalty or other extra charges. If the charges outweigh the savings, refinancing may not be worth it.

Final Word

Loan refinancing is a good option when you are struggling to repay your outstanding debt. If you choose to refinance your loan, higher credit scores or market rates may lead to better loan terms. With loan refinancing, you can choose to lower your interest rates, shorten your loan period, or opt for fixed interest rates to avoid unpredictable increases in interest amounts. While there are some downsides to loan refinancing, understanding these options can help you make an informed decision about whether it is the right choice for you.

Other Words

  • Restructured Loan
  • Revolving Debt

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