Taking out a loan with better terms to replace an existing loan is called loan refinancing. Loan refinancing is an effective method to reduce monthly payments, pay off debt, and save money. Unfortunately, it’s not always the best choice. There are circumstances that a debtor should consider before refinancing a loan.
Let’s talk about the costs, benefits, and situations where loan refinancing makes sense.
In addition, refinancing the loan will allow a debtor to adjust existing loan terms. You can opt for a longer term with reduced monthly payments or shorter terms with increased monthly payments to quickly pay off the debt.
If one has a favourable financial situation or improved credit score, it’s possible to get better loan terms when refinancing. It’s even possible to get terms that were not available before.
The Cost
Refinancing always comes with a cost. Most loans would often come with fees. It could also include appraisal fees, application fees, and origination fees. These fees add up so it’s important to weigh up the costs first. If the savings you get from refinancing is very little compared to the fees, then refinancing the loan is of no value.The Benefits
The main benefit of loan refinancing is the opportunity to get a loan at a much lower interest rate. Over time, the debtor could save a lot of money due to reduced interest rates. This is why loan refinancing is ideal for large loans like personal loans and mortgages.In addition, refinancing the loan will allow a debtor to adjust existing loan terms. You can opt for a longer term with reduced monthly payments or shorter terms with increased monthly payments to quickly pay off the debt.
If one has a favourable financial situation or improved credit score, it’s possible to get better loan terms when refinancing. It’s even possible to get terms that were not available before.