The process of replacing an existing loan with a new loan is what refinancing is all about. It allows you to shift your debts to a ‘better place’. Following are some situations where refinancing can help your case.
Pay Off A Loan Or Consolidate Multiple Loans
With a balloon loan, then you would have to pay off the remaining amount in full by a certain due date. This can lead to a large lump-sum, for which you may not have the funds available to you.
Here, the option of refinancing can pay off the original loan and produce a new loan in its place that has a longer duration of repayment.
Similarly, if you have multiple loans then it can be a hassle keeping track of payment dates and remaining loan amounts. Here, refinancing makes for a sensible option to consolidate all these loans into one umbrella loan, especially if the interest rates for the refinancing loan is lower.
Lower Your Payments
When you refinance, you are basically restarting the whole payment cycle and redefining the period that you will take to repay the whole amount.
In most cases, your new balance would be less than what your original loan balance was, and in tandem with an increased repayment term, your monthly payment should mostly likely decrease.
As a result, you are left with more money from your monthly income to allocate to other areas of expense for that month. It also means that you can now manage your cash flow better.
Change The Loan Period Or Type Of Loan
Let us assume you took a variable-interest loan in the recent past because it offered low-interest rates at the time, but that has risen dramatically owing to changing market scenario.
Instead of being stuck with the loan, a prudent alternative would be to take up a refinancing option with a fixed-interest rate that is low.
Yet at other times, for whatever reason, you may want to shorten the term period of an existing loan. You can do so by refinancing it into a new loan with a shortened term than what you had previously.