If your outstanding loans have a high interest rate or a monthly payment that isn’t manageable, refinancing can be a great way to save money and pay off your debts. You can even use it as an opportunity to consolidate all of your loan payments into one easy monthly payment. If you have outstanding credit card debt or other loans, refinancing might be worth considering.
What is refinancing?
Refinancing means replacing your current loan with a new one for a potentially lower interest rate or alternate term length. The goal of applying for refinancing is to pay lower monthly payments, pay off the loan earlier, or save on interest. The new loan may have better features or terms, improving your finances and helping to make monthly payments easier.
Why consider refinancing?
There are multiple reasons you may consider refinancing.
It comes with many benefits, like the opportunity to lower your interest rate based on your credit score and reduce the payback period. Suppose you repay five years of installments of a 30-year loan and refinance from a different lender for 20 years. It helps you repay your overall debt five years early, which could lead to significant savings on interest payments.
- If you have a variable interest loan, another reason you may consider refinancing is to embrace peace of mind.
- There’s a possibility of getting a fixed rate, which can make managing payments less stressful as the principal amount and interest remain the same each month.
Things to keep in mind
Your credit score can decrease in several ways by refinancing. If you apply for a refinance, lenders will likely check your credit history and credit score. The inquiry on your credit report, also known as a hard inquiry, temporarily lowers your credit score. However, over time, a strong payment history will improve your credit scores as you repay your new loan.
If you’re planning to refinance, you might find yourself applying to several different lenders to find one with the lowest interest rate. To prevent your credit score from being negatively affected by all these hard inquiries, be sure to submit your loan applications quickly. Credit scoring models generally treat loan inquiries within 14-45 days as one inquiry, so your credit score is minimally impacted.
When you refinance a loan, the original loan account will be closed, which can lower your score if it is a long-standing credit account that will be closed. There are, however, some credit scoring models that consider payment history for closed loans. Your credit score would be less affected if the account closes in good standing. Your credit score should also improve as you pay down the new loan with on-time payments.
You’ll also want to keep in mind that refinancing may involve additional fees, and you’ll be locked into your new repayment terms. Be sure to look at all your options to know exactly what it will cost you, as well as what types of protections (such as hardship forbearance or interest-only deferrals) that each lender offers.
Finally, remember that if you opt for increasing the term length of the loan in order to reduce your monthly payments, that’s more months in which you’ll be paying interest. While you can also lower your interest rate, that will be based on your credit score, so the difference could be substantial or minimal depending on your current financial standing. A shorter term length will typically mean higher monthly payments but less paid in interest overall, while a longer term length will typically mean lower payments but more interest payments overall. You’ll want to find the right balance between a low enough interest rate and a term length that will allow you affordable monthly payments.
How can you refinance the loan?
The criteria and obligations for a refinance loan are the same as obtaining a traditional loan. Lenders can consider your credit history, credit score, payment history on existing loans, income and employment history, and other necessary obligations.
Once you meet the standards of the lender and match the requirement, you receive an offer depending on the risk you pose to the lender.
Similarly, refinancing is also a motivating force. CreditNinja makes it very clear that people utilize this opportunity to pay off loans, irrespective of interest rate. For them, refinancing is a way to keep moving forward and repaying the loans without delaying or missing the repayment deadline — because once you see the results and the loan being paid off, it encourages you more.
In the end, whether or not you refinance your loan will depend on your unique financial situation, and what payment strategy will benefit you most in both the short term and in the long term. As with many financing decisions, you’ll want to look closely at all your options and ask questions to ensure you’re moving forward with the terms that work best for you!
*This is a guest post by CreditNinja.com. CreditNinja.com is not endorsed by or otherwise affiliated with Climb Credit.