If you have a loan or loans that are outstanding you may have heard that you should consider consolidating these loans in order to reduce the payments that you will ultimately make on these loans or to make the process of paying these loans easier. What exactly does refinancing a loan entail and what should you know before refinancing a loan will be the focus of this article.
What is a Refinance
When you refinance a loan or loans you are effectively entering into a new loan agreement. When you obtain a loan you basically receive cash in exchange for a promise to pay back the principal balance with an interest payment. The payment terms can fluctuate widely and there may be fees or charges for taking out a loan. In many ways a refinanced loan is no different than a standard loan. You make payments later on a refinanced loan and pay an interest rate as stipulated in the loan agreement. However, the major difference is that the proceeds from a refinanced loan does not go into your pocket. Instead it goes to repay an older loan.
What Happens When You Refinance?
Once the older loan or loans are satisfied you now owe money on your new loan based upon the agreement terms. Your old loans are now removed and you have one loan remaining. If you refinanced several loans into one then you now only have to make one payment per month instead of keeping track of many different loans. If you were behind on paying your loans then your credit will likely be improved by the satisfaction of the older loans.
What are the Benefits of a Refinance?
It is generally considered to be a good idea to consider refinancing if the current interest rates available to you when you borrow money are lower than the interest rate that you have on your old loan. However, keep in mind that there may be fees charged for refinancing a loan as well as for prepaying your old loan. Be aware of the terms in your refinance agreement to avoid losing money on a refinance.
When Might you Not Want to Refinance a Loan?
If the current interest rates are higher than your borrowed loan interest rate than you may want to not refinance right now. Also, if your credit score or history is not good than you may not benefit from a loan refinancing as the interest rates charged on any new loans may be punitive compared to existing loans you have.
Many people can lower their monthly payments by refinancing existing debt into a new loan. While this can provide significant benefits for a borrower there are often fees and prepayment penalties on some loans that should be considered before you refinance your loan. Be sure to read the loan agreements and consider any special stipulations on the loan agreements before signing them. A refinance may or may not be beneficial so be aware of the contract details and ask for an explanation on these details before signing any refinance agreements.