Refinancing can provide relief from unmanageable payments and can add additional revenue to meet other monthly obligations. Refinancing can be utilized for an individual loan, or several loans can be consolidated into a single monthly payment.
The actual process of refinancing a loan consists of securing a second loan and applying those funds to pay off the balance on the original loan. The goal is to secure a better interest rate, resulting in reduced monthly payments and lower interest costs over the life of the new loan.
Loans that are Eligible for Refinance
Nearly every loan is eligible for a refinancing program, including auto loans and personal loans. Although some with lower credit scores may still qualify, lenders tend to avoid refinancing debt that has a consistent history of delinquency. Even if a lender is willing to refinance a delinquent loan, lower interest rates are often not offered. Debts that are in collections or part of a bankruptcy are generally not eligible for refinance.
How Refinancing Loans Saves Money
There are several strategies to refinance loans that will lower monthly payments and substantially reduce interest costs. If payment reduction is the primary objective, lowering the interest rate and extending the term of the loan can be effective strategies. For maximum comprehensive savings, reducing the interest rate as well as the length of the loan may not substantially change the monthly payment, but the loan will be paid off sooner and the interest savings will increase.
There are circumstances where refinanced loans can include an additional amount above the original loan balance. In this case, the extra money from the refinanced loan can be used to pay off high interest credit cards or other installment loans.
Loan consolidation is another refinancing strategy often used to lower payments and overall interest charges. In most cases, the single payment will be substantially less than the combined payments of the existing outstanding loans. The savings in interest on the consolidated loan can be significant.
When to Refinance
A loan should be considered for refinancing whenever the rate of interest in the original loan is higher than current interest rates. This may be the result of an overall interest rate reduction or an improvement in the credit rating of the borrower.
Talking to a qualified Member Service Representative can provide answers relating to specific savings in the refinancing process.