What is Loan Refinancing? What are its Advantages?

Loans, especially home loans and auto loans, etc. usually have a long term and high EMIs. Thus, when the borrowers start facing difficulty repaying them down the road, they can opt for refinancing.

What is refinancing?

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When you refinance a loan, then you essentially close the account to replace it with another. In this transfer, the benefit lies with the new account that offers a lower interest rate, or some other advantages that make the loan repayment easier.

Loan refinancing can typically work as either of the following:

• You can request your current bank to refinance the loan, i.e. lower the interest rate/EMI.
• You can find another lender who is willing to refinance your loan at better terms.

What are the advantages of refinancing?

The following are the main reasons to opt for refinancing:

• Naturally, the biggest reason to choose refinancing is to get a lower interest rate and thus lower EMIs.
• You can also benefit from refinancing for a shorter term. Although you will have to pay bigger EMIs, you will pay less money on the interest.
• If your current loan has a floating interest rate, then you may get a lower interest rate by opting for a fixed interest rate instead.

What are the disadvantages of refinancing?

Although refinancing may seem like a good idea on the surface, and many times it actually is, it may not work for everyone. The following are some of the reasons why:

• When you refinance a loan, then you close one loan to open another. This means that just like your first loan, you have to pay a processing fee, service fee, etc. once again. So, when combined, if these are higher than the amount you would save from the lower interest rate on the second loan, the deal isn’t advantageous.
• You may lose some of the perks that you may have with your current loan when you switch to the new one.