The Boons And Banes Of Refinancing Your Loan

By Kishore Sabareeshan | August 7, 2018

Getting mixed feedback about loan refinancing? Understand it better and see if a refinanced loan will help you better deal with your debt situation!

It’s natural to feel stressed out about a heavy debt that’s been looming over your head. That’s exactly why the concept of loan refinancing has gained popularity. People in debt situations, thanks to a refinanced loan, are able to buy time in repaying their loan, thereby reducing their immediate stress.

Now while this sounds ideal, you need to keep specific things in mind if you really want refinancing to work in your favour. Randomly jumping onto the bandwagon can either be a hit or a miss, so it’s advisable to take an educated step.

Before we go further, let’s understand what loan refinancing is, shall we?

Refinancing is nothing but the process of replacing your existing loan with a new one – ideally a loan with more favourable terms and payments. This allows you to shift your existing debt to a better place and thereby manage your loan better by extending the repayment period.

Additional Reading: Everything You Need to Know About Personal Loan Refinancing

Now, like everything else, even refinancing has its own boons and banes. Let’s start with the good part!

Boons:

  • Reduced interest costs

Current loan offers may have a reduced rate of interest in comparison to the existing loan that you picked up a couple of years ago. So, once you move to the other loan, you can enjoy a lower rate of interest on your future payments. Picking a favourable loan certainly helps in this case.

  • Smaller EMIs

When you refinance, your existing loan balance due is smaller than the original loan amount, so naturally, your renewed EMIs are going to be easier on your bank account. Refinancing also helps you buy time, so chances are you’re earning more now than before, and that further eases out the EMI payments. In essence, you have a better money cushion now than you did back then.

  • Shorter loan period

In case of Home Loans, refinancing can be used as a tool to reduce the loan period altogether. For instance, let’s say your current loan period is 20 years. You can get the same loan refinanced into a 10-year loan and close it sooner than the earlier end date, provided you have the capacity to make the payments necessary to close it sooner than before.

  • Debt consolidation

Got multiple loans eating you dry? Get them consolidated into one single loan through a refinanced debt consolidation loan. This will not only help you keep a better track of payments but also, in the long run, favour you in terms of the interest costs. Though debt consolidation has its own set of pros and cons, in some situations it may give you an organised path to independence from debt altogether.

  • Change in loan type

Refinancing opens up the option of choosing a different type of loan from the existing one. For instance, say your current loan has a variable rate, you can consider switching to a fixed rate loan. This may introduce convenience to your life since you know exactly how much each payment is going to be. To pull this off, you need to find the right kind of loan that works for you.

Banes

  • Refinancing can backfire

Let’s say you decide to extend your loan repayment period through refinancing. Now, in this case, you’re paying lower EMIs, but in the long run, the overall interest you’ll be paying is actually much more. Sure, you may be earning more now, but when you look at it in terms of how much you borrowed and how much you paid back, the figures speak for themselves.

  • Costs of refinancing

The cost involved in refinancing is especially high when it comes to big loans, because they can be anywhere up to 6% of the loan balance. For instance, if you plan to refinance your home loan, your fees will include the home appraisal, application fee, title search, credit report fee and much more! While these are expected expenses, you may want to consider these factors before succumbing to the temptation of temporary relief from a refinanced loan.

  • Now what?

No need to be confused. Every individual’s financial situation and reason to consider refinancing may be different. To make better future decisions with refinancing, you can ask yourself the below questions that will surely help you gain some clarity.

The pre-refinance questionnaire

We’ve compiled a list of vital, self-directed questions that you can ask yourself before you form your decision about a new loan to kick out your old one. Here they are!

  • Why am I considering refinancing?

Is it for a lower EMI, lower interest rate, or a current need for money for something else? Make up your mind about this before you go further.

  • How is my financial record now?

Analyse whether your financial situation has improved since the time you took your existing loan. How? Well, for starters, you can check your Credit Score and get a detailed report about how eligible you are for a new loan – that will give you a good reality check on your creditworthiness.

Remember, it only makes sense to extend your loan period if your income has increased and if interest rates have dropped, or else you’ll just be postponing the horror, which is never advised.

  • What’s my break-even point?

Calculate how much you would save every month if you went down the refinancing path. Now, on the other hand, sum up how much you’ll be shelling out in terms of closing costs and processing fees. Now, divide the cost by your savings amount. The answer you get is exactly how many months you will take to recover your refinancing cost and actually start saving from this move.

Once you’ve quizzed yourself thoroughly, you’ll know whether it’s a good idea or not. It’s that simple. In the meantime, you can always look around for favourable Personal Loans and Home Loans on BankBazaar. After all, if you do consider a new loan, we’re the ones who can make the application process a hassle-free one for you!

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