2 min read
25 May 2021

What is loan refinancing?

Loan refinancing is the process of replacing an existing loan with a new one, typically with better terms, interest rates, or repayment options. Refinancing loans can give borrowers the chance to reduce monthly payments, save money, or adjust the loan duration.

Repaying your loan in a timely fashion is a responsibility you are sure to take seriously, as defaulting or making late payments is bound to have various adverse effects. From a lower credit score to EMI bounce charges and penal interest, the penalty of late payment is costly on all accounts. So, if you are in the cycle of loan repayment, refinancing can often be a handy solution.

By refinancing your existing loan, you not only get a new loan agreement with better terms, but you also get more time to pay off your debt. Here’s a list of pros and cons you must keep in mind before considering refinancing your loan.

Pros of refinancing

1. You can change the type of the loan

Personal loan refinancing allows you to adjust the terms to suit your needs better. For example, if you have a loan with a high floating interest rate, you can change it to a fixed rate that works better for your budget.

Alternatively, with a personal loan for debt consolidation, you can merge all your loans into one and simplify your debt management. Apply now and get a personal loan with minimal documentation and an attractive interest rate.

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2. You can pay lower EMIs

When you choose to refinance your loan, you have already paid a certain amount of it as part of your current loan. So, the amount of loan to be refinanced is already much less than the original amount. Therefore, your new EMIs will be a lot lesser than what you were paying before.

3. You can adjust your loan repayment tenor

You can either increase your loan tenor or decrease it with refinancing, depending on your financial situation. For example, if you have a home loan with a 10-year tenor, you can increase this to 20 years if the EMIs are becoming a burden on your income. On the other hand, if you are in a better financial position than you were when you first applied for the home loan, you can decrease the tenor to five years and wrap up the debt quicker. This way, you will be able to reduce your total interest obligation too.

4. You can get a lower interest rate

Lower interest is one of the most significant advantages of refinancing a loan. If you find that the interest rate offered by your lender is much higher than that provided by another lender, don’t hesitate to make the switch. Your new loan terms will not only decrease your overall interest cost but also bring down your EMIs.

If you already have a home loan, you can transfer the balance with Bajaj Finserv at an attractive interest rate. A home loan balance transfer is a smart way to refinance your existing home loan in an easy, quick and hassle-free way.

Cons of refinancing

1. Your income matters

An existing loan is not the only criteria to be eligible for refinancing. There are other aspects lenders will look at, such as your credit history and your income, before agreeing to refinance your loan. A bad credit score, a drop in your salary or losing your job since you applied for the original loan will not be looked upon kindly by your new lender, who may use it as grounds for rejection.

2. Cost of refinancing

This is one of the major hurdles you will face while choosing to refinance your current loan. While making your decision, you must know several costs need to be considered, such as the cost to close your original loan. If you are looking to refinance a home loan, for example, you will have to incur the charge of a home appraisal, a credit report fee and an application fee, among others, which you shouldn’t blindside you.

So, consider all these factors before you refinance your loan and pay attention to when in the loan’s tenor or repayment cycle you plan on refinancing. For example, if you refinance in the first half of the tenor, the benefits outweigh the additional cost. Make sure to compute all this to ensure you have a positive experience.

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