Every year loans become more affordable and popular. Along with them, refinancing, popularly called consolidation, is gaining popularity as well. Since not everyone clearly understands what it means to refinance a consumer or other loan.
Refinancing – what is it?
Refinancing a consumer or mortgage loan for individuals implies that you take out a new loan to pay off an existing loan. At first glance, the idea of “taking a loan to pay off a loan” may sound suspicious, but in fact there is nothing wrong with it – on the contrary, in many cases it turns out to be useful.
When is it beneficial to refinance a loan?
There are 2 cases when refinancing is justified:
- there is an opportunity to overpay less;
- it is possible to reduce the monthly payment.
We have dealt with the first case above – there are cases in which it is more profitable to get and pay off a new loan than to “deal” with the old one. The second case is a little more complicated – it happens that the borrower took out a loan, and after a while expenses increased (diseases, childbirth, salary cut, and so on), and monthly payments began to cause problems. In this case, with the help of refinancing, you can slightly increase the overpayment, but greatly reduce the monthly load.
The main question remains: when to go for refinancing? Are there clear instructions? Alas, there are no instructions. We have described the options in which it is advisable, but whether your situation is suitable for one of these options is a question specifically for you. The benefits of refinancing depend on the interest rate, the existing term, the remaining overpayment, the terms of early repayment, the terms of the new loan, your capabilities and other factors, and only you can calculate them. Therefore, take any loan calculator and count the terms.
Terms for refinancing a loan
You need to understand that refinancing is not some kind of fixed service, but a bank offer. And the proposals are different, so it is extremely difficult to deduce some general terms. Let’s try to describe the most common variations:
- By loan type: you can refinance non-targeted consumer, target, car, mortgage loans, credit cards.
- By the amount.
- By terms.
- By quantity: some banks allow to refinance 1 loan, some – 5-7 at once.
- On payments: some banks will not issua a new loan if the old one was repaid with delays, others allow you to have a couple of short delays in the credit history.
- Additional money: most often you can take not only money to pay off the existing loan, but also a certain amount in order to dispose of it at your own discretion.
- The documents provided: some banks will assess general information and a payment schedule for the refinanced loan, others will require a bunch of additional documents.
- According to the terms before paying it off: the bank may put an increased interest rate, which will remain in effect until you provide documents confirming the repayment of the old loan.
- By banks. Some banks allow refinancing their own loans, others do not.
The list does not end there, but we have covered the basic terms.
How is a loan refinanced?
A very common question: “Loan refinancing – how does it happen?” In fact, it is extremely simple: consolidation of debts is an ordinary targeted loan, the purpose is to repay another existing loan. It happens, respectively, as well as issuing a target loan.
How to refinance a loan in another bank?
First, you choose the offer that suits you. Then you contact the financial institution of your choice with a question about refinancing. You are told what documents you need to provide to be approved. Collect papers, wait for an answer. If the decision is positive, you will find out the terms for issuing (how to get, what documents to provide in confirmation of repayment).
It depends on the bank, you have to visit it in any case. In general, you will need the same documents as for a regular loan, plus documents for a refinanced loan.
Pros and cons
- There is an opportunity to change the terms of the current loan;
- You can combine several loans into one – it is more convenient to pay.
- Finding profitable refinancing terms are not so easy;
- Most banks will refuse if there are delays;
- If you are not careful about calculating the benefits, you can harm your budget.