Refinancing a loan is the process of replacing an existing loan with a new loan. The new loan pays off the current debt. The banks should have better terms that can improve your finances. The details of how you refinance will depend on your lender and the type of loan that you have.
When a bank has imposed a penalty on you, but you feel such is underserved, you can write a penalty waiver request letter sample to address the issue. People choose to refinance their loans for different reasons, but whichever the reason, here are the benefits you’ll enjoy if you decide to refinance your loan
- It helps you consolidate your debts
Refinancing is an excellent way to combine your multiple debts. This will make it simpler for you to be on top of ongoing payments and eliminate the number of high-interest rates and late fines that you may incur.
A good example of how refinancing can combine your debts is if you took a loan for a car, and payments owing on credit cards, you can refinance your car loan and combine all those debts into one package with just one interest rate.
- To save money
The most common reason why people refinance is to save money on interest rates. When refinancing your loan, you need to refinance into a loan with a lower interest rate than the existing interest rate.
If the loan is a significant amount and it’s a long-term loan, and its interest rate is low, it can lead to a lifetime interest saving.
- To change the type of your loan
Changing your loan type can also be a good reason to refinance your loan. This means that if maybe you have a loan that has a variable-rate interest, you might want to switch to a loan with a fixed rate. A fixed-interest rate may offer protection when the rates are currently low but are expected to rise.
- Lower payments
Refinancing can lower the monthly payments that are required. This results in more money in the budget for other monthly expenses and smooth cash flow management. When you refinance, you extend the amount of time you’ll take to repay the loan. The new monthly payments should reduce because the balance will be smaller and you’ll have more time to repay it.
- Pay off a loan that’s due
There are some loans which require to be repaid on a specific date. This can be a bit difficult on your side if you don’t have the money available to make the payment, so the best option would be to refinance the loan-to let a new loan pay that loan which is due and gets more time to pay off the new loan.
- Shorten the loan term
Refinancing does not only mean extending the payment; it can also shorten your loan term. For example, if you have a 20-year home loan, the loan can be refinanced to a 10-year home loan. This move can make sense if you want to pay the loan on large amounts and pay off the debt more quickly. You can also pay extra amount without having to refinance the loan.