If you have a loan that’s too expensive or too risky refinancing might be a good option for you. Refinancing lets you replace your old loan with a new one so you can pay off the debt of the old one completely. However, its is crucial to find a lender with better loan terms. Once you’ve found a lender all that is left to do is apply for a new loan which will completely pay off the debt of your old loan. Payments on the new loan are made until it is paid off or refinanced.
Save money. Refinancing into a loan with an interest rate that is lower than your existing rate can result in significant savings on interest costs especially with long-term loans and large dollar amounts.
Lower payments. When you refinance, the amount of time you’ll take to repay a loan is extended. Additionally, your balance is smaller than your original loan balance which will lead to a decrease in the new monthly payment. This allows easier cash flow management and more money in your budget.
Shorten the loan term. Instead of extending repayment, you also can refinance into a shorter-term loan.
Debt Consolidation. In order to keep the tracking of payments simple when you have multiple loans, it might make sense to combine them into one single loan, so that you can get a lower interest rate
Switch to a fixed rate loan. If you have a variable-rate loan, you might prefer to switch to a loan at a fixed rate. A fixed interest rate offers protection if rates are presently low but might potentially increase.
Pay off a loan that’s due. For example, some business loans are due after just a few years, but they can be refinanced into longer-term debt after the business has established itself and shown a history of making on-time payments.
If your credit score was low in the past and has now improved, you might be eligible to refinance your older loans at a lower interest rate. While refinancing can change the terms of a loan, some aspects of loans do not change with refinancing such as your loan balance- as long as you don’t take on more debt while refinancing. If you used collateral for the loan, that collateral probably will still be required for the new loan.
As with everything else, refinancing also has its cons. Hence it is imperative to find the best rate and the best terms. Upfront costs might be too high to make it worthwhile, and sometimes the benefits of a current loan outweigh the savings associated with refinancing. Therefore, always make sure to get a few quotes before inquiring with your current lender.