Friday, 19 July 2024
Business Finance

When Does Refinansiering Make Sense And When Is It Unwise

Refinancing a personal loan allows a borrower to replace their existing product with possibly new terms or a lower interest rate. Clients should calculate the numbers to ensure savings by making the move. 

Securing a lower rate decreases borrowing expenses meaning the loan will be less costly overall. Go here for defining details on refinancing.

When you refinance to change the term, extending it to a longer loan life, the installment repayments will be smaller, saving money with monthly obligations. The only caveat with this is that the interest will accrue longer, making the product more expensive.

Applying with the same lender for the refinance can be beneficial, but it’s not a requirement. Sometimes loan providers won’t refinance, or there are just more competitive rates with another lending agency. 

Whomever you choose the funds you receive will pay off the existing loan leaving you with a new, less expensive product to repay. You might be borrowing more money with the new loan, but there’s still the potential to save money depending on the terms, rate, and conditions of the loan.

Does Refinancing A Personal Loan Make Sense

If you’re considering refinancing a loan, please see this site to learn more; the idea is to calculate the figure to ensure the move will save you money.

Refinancing involves applying for a new personal loan with a lender offering competitive rates to replace your current product. The funds received will then pay off the balance to the existing lender.

Clients will pursue this process for numerous reasons, but a commonality is often the desire to achieve a new, lower rate or to get a lower monthly repayment. Sometimes, the borrower has a need requiring them to request additional funds through refinancing. 

The option isn’t necessarily the right move for every situation. It takes careful consideration and forethought to determine whether a refinance will benefit your circumstances in the long run. Consider these scenarios as reasons you should take the opportunity.

  • Your credit rating has improved

An ideal way to qualify for a reduced rate is to work diligently to improve your credit profile resulting in a boosted score. When lenders see a consistent history of repaying on time, the provider is more willing to take you on as a risk at a lower rate.

A good process would be to shop lenders before reaching out to your current provider to see who will offer the most competitive rate and the fewest fees. If that turns out to be your lending agency, approach the entity about the refinance to see if it’s possible with your new criteria.

Not all loan providers will refinance their products, but that’s not always the case; some do. It’s a chance to take.

  • Switching from a variable to a fixed rate

It’s somewhat unusual to have a variable rate on a personal loan. These usually have a predetermined term with set installment repayments and a fixed rate. Establishing a realistic budget is challenging for those who choose the variable rate, making managing finances each month tricky.

Aside from that, when the trend is a rising scale, you could reach a point of difficulty in affording the repayment, with the loan becoming too expensive. A refinance means you can switch to a fixed rate and lower than what you’re likely currently dealing with.

This means a consistent repayment each month, allowing the opportunity to establish a reasonable budget plus easier manageability of the monthly obligations. You’ll have the benefit of knowing there will never be a time that any of the terms or conditions of the loan will change.

  • The balloon payment is a frightful thought

When signing on for a loan, usually in dire need at that point, most people will take what they qualify for to receive the funds timely. Some personal loans involve a balloon payment which is essentially an excessive repayment amount compared to your standard obligation.

These come due at the end of the loan’s term, with most people attempting to avoid this at all costs. They do so primarily through refinancing if nothing has drastically changed in their credit profile or financial standing to deter them from qualifying for a new loan.

A question to ask upfront is whether the new lender has this exact requirement with their loan products or if there are any other fees or charges you should be aware of that would make refinancing with them unwise.

  • Life circumstances have changed drastically

If your life circumstances have taken a drastic turn affecting your ability to make repayments on a timely and consistent basis, refinancing to make the monthly repayment smaller is essential. 

That would mean either approaching your lender to extend the term on the current loan or requesting a new loan with a longer term. You will be less likely to qualify for a lower rate if your situation involves your financial status, like perhaps employment loss or a demotion leading to income reductions.

Remember, while you will get a lower monthly repayment, you will also be accruing extra interest with the extended term. That means the product will be more expensive when the balance is paid in full.

That means, however, you can begin paying extra on the loan when your situation improves. Perhaps, you can refinance once more if you get a new, better-paying position allowing a lower rate, maybe, and shorter terms, ultimately, less expensive overall.

  • You want to repay the loan

Some individuals take loans because they have an emergent need or an unavoidable expense they must take care of straight away, but they don’t have the funds at that very moment. It doesn’t always mean they wouldn’t have if they could wait, but emergencies don’t allow that luxury.

Since the borrower now finds themself in a position to more readily pay the loan faster than the initial loan term, there can be a request for refinance to reduce the term. That will mean less interest will accrue over the loan’s life for a less costly product.

In that same vein, it will also mean higher monthly installments. Before you take on that obligation, making sure these repayments won’t cause detriment to your financial status is vital. 

Plus, it’s wise to consider scenarios that could transpire, including the potential for job loss, health concerns, family issues, or anything that might change your life circumstances, rendering you unable to make such high repayments during the loan’s term.

Does Refinancing A Loan Always Make Sense

Sometimes, a personal loan refinance isn’t necessarily the right move. It’s always recommended to configure how taking the step will ultimately save you money. If you can find no advantage, it doesn’t make sense to put forth the time and effort. Consider these situations.

  • You have a slight balance

If your balance is substantially diminished on the current loan, it’s unwise to consider refinancing for a whole new product. It makes more sense to put forth the added effort to pay the remainder of the total off. 

Likely you’ve worked through most of the interest and are working primarily on the principal. When you refinance, you’ll start fresh with new interest and the carried-over balance. 

You could also be charged a prepayment penalty for paying the loan off ahead of schedule and an origination fee in addition to the balance. These can equate to substantial percentages of the balance.

  • You’re getting a higher interest rate on the loan

Agreeing to a loan with a higher interest rate than your existing loan rarely makes sense. The only possible scenario where you could make this logical is if you needed to extend the term because you can’t afford to pay the monthly repayments where they’re currently set. 

Extending the term will help you bring the installments to a more manageable level. 

Aside from that, you will pay substantially more for the loan overall. In some cases, you can speak with your current loan provider to get your current loan term extended instead of doing a complete refinance. That’s not always possible, but some lenders are generous and will reconfigure borrowers’ loan terms.

Final Thought

Ideally, when refinancing a personal loan, you’ll save money. That’s the whole purpose of going through the intricacies of the process. If you break even or get a higher rate, there’s no logic for the change. 

While it can benefit you to obtain an extended term for more affordable and manageable repayment installments over the course of the loan, you will be paying a higher overall price point for the product.

It might make more sense to consolidate as much debt as possible into a single refinance with a fixed repayment so you can pay a higher installment for a shorter term to save money in a couple of different ways, with fewer monthly obligations and less interest over the long term.

In any event, work with the existing lender and the new provider to ensure a seamless, stress-free refinance.



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