Refinancing a loan is the process through which you replace an existing loan with a new one. Refinancing is done for better terms or features that improve your financial situation. For example you may refinance your mortgage for the sake of lower monthly payments or a lower interest rate.

How to Refinance a Loan

Before you refinance your current loan you must examine the specifications of your current loan agreement to assess the amount you are paying and check to see if there is a prepayment penalty included in your loan agreement because the termination cost of the current loan agreement can outweigh the benefits of refinancing. You can compare these details with what other lenders are offering you and choose a refinancing arrangement that is best suited to your financial goals.

While the more specific details depend upon the type of loan you apply for and your lender’s requirements. Here is what the process generally is like.

  • You have an existing loan that you would like to have improved in some way.
  • You research and find a lender who offers you better loan terms.
  • You pay the existing loan completely using the new loan’s amount.
  • You start making regular payments on the new loan until it is completely paid off or you refinance again.

Benefits of Refinancing a Loan

Here are some benefits of refinancing a loan.

  • Refinancing can help you save money on interest costs. If you manage to get a new loan that has a lower interest rate than the existing one, you will be saving a lot of money especially if the loan is in big dollar amounts and is long-term.
  • Refinancing can lead to lower monthly required installments. Which means if you get a new loan that requires you to pay less each month, you will have money to meet your other expenses and have better cash flow management.
  • Refinancing can help you buy more time to pay off a loan that is due but you lack the funds to repay it. Loans like balloon loans need to be paid at a specific date and refinancing can get you the amount to meet the deadline.

Drawbacks of Refinancing a Loan

Here are some drawbacks of refinancing a loan.

  • Refinancing can be very expensive in terms of transaction costs, origination costs and processing costs. These costs can outweigh the benefits of getting a loan refinanced.
  • You can lose certain benefits that come with your current loan arrangement. Like federal student loans being more flexible than private student loans if you fall on hard times.
  • Refinancing can often backfire as you may end up paying more interest in total, even though you pay less on a monthly basis, due to stretching out a loan over a longer term.

Whether you want to change the loan term length or want to avail lower interest rates, there are many loan refinancing options available in the market. With the boom in online lenders creating competition for the traditional banks, you can find services and refinancing packages that can meet your specific financial goals.

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