What is loan refinancing and is it profitable? What are the pros and cons of using this service? It will be useful to everyone who overpays for a loan at an inflated rate or suffers from a high debt load. 

Refinancing – what is it? How are the differences from a loan? 

It is the process of taking a new loan to pay off your current debt at a bank or microfinance organisation. It can be used to repay a credit, a loan, or credit card debt. You can combine several debts into one.  

This is a type of targeted loan. When refinancing, the money is not given to the borrower – it is immediately sent to repay his debt. 

When is it worth refinancing a loan?

Whether it’s worth refinancing depends on your answers to the three questions below. They will help you understand whether refinancing your loan makes sense.

Are the terms of your current loan favourable?

Open the loan agreement. On the first sheet will be written the total cost of credit – the actual overpayment percentage. Compare the percentage in the contract with the available offers on the market. Usually banks will quote a promotional rate, which always attracts more than the total cost of credit.

If you want to refinance your credit card debt or loans, it is clearer here. Rates on these products are usually higher than on credits, which means refinancing will be favourable. But you should also consider the terms – loans are usually given for a short term, while credit cards are for a long term. If the refinancing term is longer than a few years, you may overpay.

The benefit of refinancing will be felt if the refinancing rate is reduced by at least 2% per annum. 

How long has it been since you took out your current loan? 

It is not advantageous to refinance a loan (even at a lower interest rate) if you have already paid a significant part of the interest. With an annuity repayment scheme (it is used for most loans), at the beginning of the term, mostly interest is repaid. By the middle of the term, most of the overpayment has already been paid to the bank, so the difference in the rate will not be so significant. 

Are you having trouble paying off your current loan? 

If your income has dropped and your monthly payment has become too high, then refinancing is necessary. It will help you lower your payment. If you refinance your loan for a longer term, you will lower your payment to a comfortable level. Even if the interest rate is a little higher and the overpayment is even higher due to the longer term, refinancing will still be beneficial. Such a move will help you avoid delinquency and deteriorating financial reputation. 

Refinancing will be useful if it helps you reduce your credit load by at least 10 percent of your income. 

What is easier, better and more favourable: refinancing or a new consumer loan?

You can take out an ordinary loan and use it to pay off your existing debts yourself. But there are nuances here. 

If you already have a loan or several, it will be difficult to get a new one. The bank will take into account the existing credit load. In the case of refinancing, it will not be taken into account.

The refinancing rate may be lower. Especially if we are talking about a mortgage. In addition, the refinancing rate can be lowered due to competition between banks. They are happy to get a proven customer who has been paying the loan faithfully at another bank.

A consumer loan will be more convenient if the amounts and terms are small. The bank will not waste time on refinancing small amounts or loans with less than 4-6 months left to pay. If you have taken an unfavourable loan and want to remedy the situation, a consumer loan may be the right solution.