If you are like us, the current situation might have given you the extra push to take a serious look at your finances, your situation, your goals (and your progress towards them). As you examine your spending, you may discover you could be paying for your home, car, or other loans in smarter ways. Interest rates might have fallen and your financial circumstances may have changed since you first borrowed the money, and that could make you eligible for more beneficial loan terms. Whether you want to lower your monthly payment, reduce your interest rate, or move some cash around for other life expenses, refinancing your loans could help.
Join us as we take a journey to better understand refinancing and the potential benefits you could reap from making this money move.
What is refinancing?
Refinancing a loan allows you to replace your current debt obligation with one that has more favorable terms. As they say—out with the old, in with the new. This new loan replaces your old loan, meaning your loan won’t simply go away, instead it starts over. If you have good credit and necessary/beneficial reasons for doing this act, refinancing can be invaluable for your financial health. Sounds great, right? It is, but refinancing a loan is a major decision that shouldn’t be made before doing the proper research and chatting with your financial advisor.
Now that we have had a proper refresher on the overall subject matter of refinancing, let’s discuss the benefits.
Benefit 1: lower interest rates
Lowering your interest rate can have a significant impact on your finances for years to come. Not only will you be lowering your monthly cost, but you will be able to save more money over the length of the loan term. Chances are interest rates have changed since you initially negotiated your loan due to developing market conditions. For example, interest rates are extremely low due to the country’s current economic status as it maneuvers the novel coronavirus. If rates have gone down since you took out your loan or your credit score has increased (or both), now may be a great time to refinance.
Benefit 2: new loan terms
Eager and able to pay off your loan? Refinancing to a shorter loan term could be the right answer. You may be stuck in a fixed-rate loan that spans for many years. While this may be ideal for others, it may not be best for you. If you have the financial capability to pay a steeper sum each month, refinancing could allow you to pay off your loan quickly, pay less in interest overall, and get you on track to financial freedom.
The opposite could be true, too. Maybe you’re hoping to extend your loan term and lower your monthly payments—in which case, refinancing could help you secure this outcome as well.
Benefit 3: lowering your monthly bill
Who wouldn’t like to lower their monthly bills? Refinancing can be a tool to free up some of your hard-earned cash. Whether you qualify for a lower interest rate or extend the amount of time you have to repay your loan, your new payment will likely be smaller and more manageable than your previous monthly obligation. This can be a real benefit if your financial situation has recently changed and you need more money in your monthly budget to stay on top of your other bills and have room to save.
PRO TIP: Play around with an online loan calculator to help understand just how much changing your interest rate or the term of your loan could impact your monthly payment!
Benefit 4: consolidating your debt
If you are juggling several loans at once and struggling to stay on top of your different payment deadlines and creditors, consolidating debt through refinancing might just be your saving grace. Not only can consolidating your debt into one payment make things more manageable, but it can also improve your credit. Keep in mind, the initial act of consolidating can cause a negative dip in your credit score. However, don’t let this discourage you. If you are diligent in making timely payments and can secure a lower interest rate, this act can put your credit in better standing over the term of the loan.
Remember, refinancing isn’t the right answer for everyone. If you are interested in learning more about your options and whether you could benefit from this strategy, visit with a financial advisor at your local credit union today to learn more.