Various life circumstances often lead to the fact that the loan turns into a heavy burden on the family budget. The way out of this situation is to refinance loans.
Loan refinancing refers to the process of taking out a new loan on more favorable terms to pay off one or more outstanding loans in order to reduce the financial burden of the borrower. You can refinance a loan both at the bank that issued the previous loan, or at another financial institution offering loan refinancing for individuals. Within the framework of one agreement, two or three loans are also combined with one monthly debt repayment.
What loans are profitable to refinance?
Today, banks offer various refinancing programs. It is possible to refinance the following types of loans:
- personal loans;
- cash loans with annuity repayments;
- credit cards;
- secured loans;
- payday loans;
- loans issued in pawnshops;
- mortgage.
Banks willingly refinance personal loans and credit cards from other banks. Most banks refuse to refinance payday loans issued by micrifiance institutions and pawn loans, especially when the person has many of them. You can refinance payday loans or loas issued by pawnshops in other similar organizations, but such transactions rarely bring benefits.
As part of the refinancing service, banks can provide loan extension for one-three months, which also positively affects the financial capabilities of the client.
Loan refinancing: how it works
A new loan is issued according to the same scheme as a traditional loan. The bank offers on-lending programs, which are usually found on the official website. The stages of refinancing include:
- fill out a request on the site, provide the required personal information;
- clarify data about the future client in a telephone conversation with a bank employee and set the date and time for the client to arrive at the branch with documents;
- fill out an application at the lender’s branch;
- wait for the bank’s decision;
- clarify all details of the financial agreement and sign the contract;
- wait for a transer of funds into your bank account;
- repay the previous debt.
Pros and cons of loans refinancing
Before initiating a loan refinancing process, you need to carefully read the terms of the new loan and calculate the total overpayment. Remember that banks are not charitable organizations and issue money loans for their benefits. Refinancing is considered profitable only if the total overpayment is minimal.
Benefits of loan refinancing:
- reduction of interest rate;
- reduction of monthly payment;
- loan refinancing does not damage the credit history;
- the ability to adjust the terms of payment;
- consolidation of several loans into one;
- possibility to extend the term of the contract.
We also highlight the cons of loan refinancing:
- the need for additional expenses;
- the need to collect documents;
- difficulties with certain types of loans (e.g. payday loans);
- lack of opportunity for refinancing if the number of payments made does not exceed one or three.
Before applying for a loan refinancing, you need to make approximate calculations in order to assess the possible risks. Not always a decrease in the monthly payment means a benefit in the long term. It is not recommended to refinance a loan if less than six months are left before the end of full repayment.
To get a better understanding of the costs, use a loan calculator. However, keep in mind that the calculations on the site differ from the final decision of the bank.
The benefit of loan refinancing will be subject to the following conditions:
- no more than half of the amount paid on the original loan;
- there is no insurance in the new loan;
- there are no additional expenses;
- the difference between the interest on the old loan and refinancing is 5%;
- a large amount is refinanced.
Requirements for the borrower
A potential borrower must meet the requirements of the bank. The main loan rejection reason is a high financial burden, systematic delays in paying monthly payments, and a poor credit history.
You are likely to get approved if you meet the following borrower requirements:
- you are employed in the current job for at least six months;
- you have a stable income;
- you can provide proof of income;
- you have an identity verification;
- you are of legal age.
Note: Banks may offer various conditions, for example, this applies to age restrictions.
Lon refinancing gives you a chance to repay your loan on time and avoid a damage to your credit score. But this financial program is effective only in cases where it brings not only a reduction in the monthly payment but also an overall benefit. Like any other banking product, it requires careful analysis and calculations in order to eliminate the risk of falling into debt.