When refinancing a loan, the borrower will have to apply for a new loan to pay off one or more other loans. Refinancing is an option when interest rates are high on the current loan, and the borrower wants to avail of lower rates or reduce monthly-paying plans. This article will guide you through refinancing loans and outline points to consider if you should refinance your loan.
Why do people refinance loans?
Borrowers refinance their loans for various reasons, including lower interest rates, a faster payoff on their loan, or simply to convert a variable-rate loan to a fixed-rate loan. Refinancing can reduce your monthly payments and shorten your loan term, saving you money in the long run.
Student loans
Refinancing can be used to combine several loans into one manageable payment. For example, a recent grad might have several types of debt — subsidized federal loans, unsubsidized federal loans, and private loans — that he or she would like to repay simultaneously. Private and federal student loans often have different interest rates and different servicers, so the borrower makes multiple payments each month. To avoid this, the borrower may consider refinancing to a single loan.
Credit cards
When you use a personal loan to pay off a credit card, you may be able to get a lower interest rate. This can make your overall financial situation more manageable.
Mortgages
People often refinance their home loans for two main reasons: to lower their monthly payments or shorten the loan’s term length. It’s important to remember that refinancing to shorten your term length or lower your monthly payment by $100 or $200 probably isn’t wise since closing costs could add up.
Auto loans
Borrowers can lower their monthly payments by refinancing their auto loans. A restructured auto loan agreement can help people at risk of defaulting on their debt.