When you have taken on a personal loan but find it a burden to make the payments or the repayment tenure is not favourable to your financial circumstances or if the current personal loan interest rates are lower than the one you are paying, you can opt to refinance your personal loan. What does refinancing your personal loan mean?
Refinancing a loan of this type refers to taking on another personal loan to pay off an existing one. The new loan usually comes with better personal loan interest rates and lower monthly payments. Refinancing a loan makes sense for you in the following scenarios:
1. There is a lower personal loan interest rate on offer: It is a bargain when the new personal loan is charging a lower interest rate than the existing one. This implies that you can make lower monthly payments than you are at the moment. With a personal loan EMI calculator, you can calculate the difference in EMIs you will be paying every month.
2. A rise in your income level: If your income has increased since you took on the existing loan, you may be motivated to pay it off sooner than you initially anticipated. To do so, you can opt for another loan with a shorter tenure to pay off the existing personal loan immediately.
3. Your credit score has improved: With a better credit score, you are able to secure better terms for your personal loan, such as lower personal loan interest rates, favourable repayment tenure, etc. If a lender agrees to better terms, it is prudent to refinance your personal loan with one that serves you better.
4. You want to extend the repayment tenure: If you need more time to pay off your loan, implying lower EMI payments, then you can refinance your loan to get a longer repayment tenure.
5. Change or remove a co-applicant from your loan: If for any reason you need to add, change or remove a co-applicant from your personal loan, you can do so by refinancing your loan. The new loan will come with a new set of terms and conditions which is when you can make the changes you need.
There are different types of refinancing available. The main types of refinancing are:
– Rate and term refinancing where the entire loan amount of the existing loan is fully paid off and a new loan is given.
– Cash-out refinancing works when there is a collateral asset involved. If the value of the asset increases, the value will be withdrawn and exchanged for a higher amount.
– Cash-in refinancing refers to you paying off the loan by making smaller payments or paying it at the lower-to-value ratio.
While refinancing a personal loan does make sense if you are benefitting from the exchange, you need to be mindful of the following:
1. When you refinance a loan, there are many charges levied such as foreclosure charges, documentation fees, processing fees, etc. It is prudent to check if you are benefitting from changing your loan when you account for the additional charges. If the difference is marginal, it may make more sense to stick with the existing loan.
2. Refinancing a personal loan makes sense only in the early stages of your repayment tenure. This ensures that you have enough time to maximise the benefits out of the refinancing.
3. When opting to refinance, ensure you go through the loan balance transfer documents thoroughly so you don’t miss out on any important details. Ensure you ask the lender to clear any doubts and answer any questions you may have in regard to the terms and conditions of the refinancing.
When you go through the options available to you, given your current financial standing, it does make sense for you to refinance your loan if you end up paying it sooner or make smaller monthly payments.