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Aug 22 2013

Loan refinancing risk and benefits

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   Situations where we do not have enough money to buy expensive things or property occur frequently. Purchasing a house or apartment can be a prime example of such a situation. People get a bank loan to resolve such issues. These loans are long-term in most cases. We will talk about the possibility of changing the bank that provided the long-term loan or other words about loans refinancing today.

The general definition of loans and its features we have discussed in the article about the personal loans. We know that loan repayment term can be 5, 10 or even 20 or more years. The situation in the credit market can change very much during this time. We will not consider the case when credit conditions worsen (increasing interest rates, reduced maturities, etc.).

Let’s consider a situation when credit conditions are improving, including reduced interest rates on loans, reduced collateral requirements, increasing the loan terms. Banks don’t really want to change the current conditions of the loan agreement in such cases.

You need to carry out regular monitoring of the credit market and apply to a bank with proposals for changes in the arrangement, if you see that there are better terms nowadays.

Banks may agree to changes in many cases as a result of negotiations. You need to find another bank and make refinancing of your loan if the bank refuses to change the terms of your loan.

Definition of loan refinancing.

A loan refinancing is an obtaining of loan in another bank on better terms to repay existing loan.

Refinancing scheme is quite simple. You get a loan in bank where you are offered better conditions (especially the refinancing rate) and transfer it to the repayment of your current loan with worse conditions.

You should definitely check out possibility of early repayment of your active loan, before you start refinancing, because the penalties available for early repayment in some cases.

You also need to remember about the purpose of the loan. The new bank should know that you want to use loan for refinancing and this feature must be provided in the loan agreement.

You should also know that banks do not give money to the client, but transfer them directly to another bank loan repayment in most cases. This doesn’t apply to loans for consumer purposes. Such loan can be obtained without any limitation of the using purpose and you can use it for other loans refinancing.

Payments for opening and maintenance of accounts (refinancing fees) should also be taken into account when you plan refinancing. These will be additional costs which have to be considered when you will determine the effectiveness of refinancing.

The main refinancing risk is that after some time the loan agreement may change and the new loan will also be not favorable.

The main benefits of refinancing are the possibilities to minimize your financial losses, reduce the size of monthly payment and increase the term of the loan.

   If you have any refinance questions please contact me or write your comments.

1 comment
  1. PhD

    A refinancing of loan is a very useful, if you can find a creditor with better proposals.

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