These days, it’s become more of a norm to get a personal loan. After all, the cost of living is quite high in the top cities in India and even with a high salary, you can’t always save enough to fund big purchases such as a car or an apartment. However, what do you do when you aren’t able to repay a loan and fear you might actually default? In a situation like this, refinancing is often a good option.
What is Refinancing?
In refinancing, you take a new loan that pays off your current loan. The idea is that the new loan has better terms for repayment, lower interest rate, etc. So, while your outstanding debt is still the same, the repayment is easier.
The following are some of the common reasons why people refinance their home loans, personal loans, etc.:
1. Smaller EMIs
When you refinance a loan, then you start fresh. So, if you are already into the 5th year of a certain loan with a term length of 10 years, then when you refinance it, you can get another 10 years for repayment. This means that the EMIs become smaller. Also, since you have already repaid a good portion of the debt (up to 5 years), the principal amount is lower which means the EMIs are again smaller.
2. Saving Money
If your current interest rate is too high and the bank is refusing to lower it for any reason, then you can refinance the loan with a different bank that offers a better rate. If you have taken any long-term personal loans, this can save a lot of money.
3. Shorter Loan Term
A lot of times, it helps to shorten the loan term rather than extend it further. Let’s take an example:
Say, you took a home loan with a term length of 30 years and the monthly EMIs of Rs. 20,000. However, after 10 years, your salary increased threefold and you can easily pay two times the EMI. This can be a good idea because you can repay the loan sooner which means you can save the total amount you would otherwise pay in the form of interest. With refinancing, you can easily enjoy this benefit.
4. Changing Loan Interest Rate Type
Getting loans for bad credit or with low monthly income isn’t easy. Thus, you have to compromise and settle with whichever option you get. However, once your credit rating improves, you can refinance the loan to get better terms.
For instance, if you originally took a loan with a floating interest rate, then you can refinance the loan to enjoy a fixed interest rate which is safer.
Things to Remember
If you are seriously considering refinancing a loan, then be sure to note the following first:
Refinancing a loan is beneficial for many however, there is always two sides to everything. So, don’t make any impulsive decisions just yet and take your time before signing on the dotted line.
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