Making payments on a loan with suboptimal terms can make you feel trapped. Luckily, refinancing can help you find more suitable terms for the loan.
Essentially, refinancing replaces an old loan with a new one with terms that are better for your situation. But it’s not all fanfare and applause—there are tradeoffs associated with refinancing.
What Can Be Refinanced?
While mortgage loans may be most commonly refinanced, you can refinance auto, personal, and even student loans. You can even “refinance” credit card debt by transferring the amount left to pay to another credit provider with better terms or taking out a loan to pay off the debt.
Not all lenders will refinance your loan, though. Just like how you had to convince a lender that you were a good fit for your original loan, you’ll need to do the same when you refinance. Lenders will consider your income, credit history, and credit score.
Benefits and Risks
The benefits of refinancing could include lowering your interest rate or monthly payment, or changing the length or type of your loan. But it’s likely every benefit will come with a corresponding drawback. Sometimes lowering your monthly payment requires extending your loan, which can mean that you pay more overall. Shortening your term can make it harder to afford your payments if your financial situation changes unexpectedly. If you refinance federal student loans, you could lose access to debt forgiveness or government relief programs.
When to Refinance
The best time to refinance depends on multiple factors. If interest rates have dropped since you got your loan or if your credit score has improved significantly, it may be worth trying to lower your interest rate with a refinanced loan. If you’re struggling to make your monthly payments, lowering your payments by getting a longer term, even if it means paying more overall, can help take some of the strain off of your budget.
Finding the Best Deal
To figure out if refinancing will be the right for you, you’ll need to do some calculations. Determine how much your original loan will cost by adding what you have left to pay and the amount you will pay in interest. Next you’ll need to do some leg work. Reach out to potential lenders to get quotes. As long as you do this in a short period of time (usually about a month), talking to multiple lenders should only count as one hard inquiry on your credit report. If you have multiple inquiries spread out over a longer period of time, it can impact your credit score significantly.
Once you’ve found the best deal, compare the difference between the refinanced loan and your current one. Do you end up coming out on top? If so, refinancing may be one of the most powerful moves you can make to help overcome debt.
Noble Credit Union, voted one of the best credit unions in California, offers offer members full access to a wide range of financial education and services, including low rate auto loans, MyRewards Visa credit card, mortgage and equity loans, online and mobile banking, and more. For more information about membership at Noble Credit Union, call (559) 252-5000 or visit NobleCU.com.