Refinancing a loan means you use the funds you receive in the new loan to pay off the existing loans. Then you’ll make payments on the new loan. Refinancing a personal loan allows you to condense existing loans and replace them with a loan that may have a lower interest rate or a different repayment timeline.
This is typically done when the current interest rate is lower than when you obtained the loan, or if you need an extension on repaying a loan. A lower interest rate can reduce the cost of borrowing, so you pay less on the overall loan, and an extended loan could mean you pay less interest each month since you will be paying for a longer period of time.
When Should I Refinance a Loan?
The biggest factor of deciding to refinance a loan is whether or not it can save you money. However, there are a few other factors involved. Here are a few examples of when refinancing your loans could be helpful.
- A better credit score: a better credit score can lead to a lower interest rate. A lower interest rate will save you money in the long run and is a good reason to refinance.
- Refinancing can be a good option if you want to change your APR rate. If you are currently on a variable rate, you can refinance to get a fixed rate, which may save you money.
- If your income has decreased, you may need to refinance a loan for a lower monthly payment. If you’ve lost your job or obtain other debts that also need payments, getting a longer-term loan can lead to lower monthly payments.
- If you want to pay off a loan faster, and you can afford the larger monthly payments, you can refinance for a shorter loan term, which will get you out of debt faster.
When Shouldn’t I Refinance a Loan?
While refinancing a loan may seem like a good idea, sometimes it will only cause you more trouble.
For example, if your loan balance is quite small, there isn’t really a point to get a new loan to pay off the existing one. Many refinancing processes can incur fees, and it’s not worth paying the extra money. If refinancing a loan would get you a higher interest rate rather than a lower one, it would be wise to pass up the opportunity since it will cost you more money. If you choose to extend your loan repayment term, you will end up paying more interest than you would with the shorter term, so if you can pay off your loan sooner, it may be the better option.
Should I Refinance a Loan Before Retirement?
When considering the golden years of retirement, it’s wise to ensure you’re in the least amount of debt possible. That being said, is it a good idea to refinance a loan before you retire? Here’s why refinancing a loan can help you with retirement:
- Refinancing a loan can lead to a shorter loan term. This means you’ll pay off your loan faster and save yourself years of interest payments, saving you more money in the long run.
- Refinancing a loan means you can consolidate high-interest debt. For example, if you have a 15% interest payment on a credit card, but a mortgage payment is only 5%, it may be worth getting a mortgage loan and paying off your credit card debt to save the amount of interest you’ll have to pay.
- If interest rates are competitive and low, refinancing a loan could mean a lower interest rate. This means you can borrow money for less, saving you interest payments in the long run.
Should I Wait to Refinance a Loan Until After I’m Retired?
The short answer is no. While it’s certainly possible to do so, your income will drop after retirement, and you may not be eligible for a refinanced loan. When considering your eligibility for a loan, the lenders will look at your income to see if you can pay them back. Since you’ll no longer be making income from work, they may not offer to lend you money for fear you won’t be able to pay it back.
Questions to Ask before Refinancing a Loan
While we’ve given you the pros and cons of refinancing loans, there can always be room for doubt. If you’re still unsure whether refinancing a loan is a good option, you should ask yourself a few of these questions.
- If you’re refinancing a mortgage, how long are you planning on staying in the home? You can use the payment to pay off the remaining mortgage if you sell it. Are you passing the home on to your children? Will your estate have enough funds to pay off the mortgage?
- How will you change your budget if you are refinancing to a shorter term? A shorter-term loan usually means a higher monthly payment. Can you afford it?
- If you seek lower payments, how much would refinancing a loan add to your monthly budget? Research the numbers, fees, and interest rates to get an idea.
- How much will the refinance cost? Refinancing a loan can save you money but also incur fees. How would paying out-of-pocket affect your savings? How would rolling the cost of fees into the loan affect your payments?
- What interest rate do you qualify for based on your credit score? How does this compare to the rate you’re currently paying?
- What are you hoping to accomplish by refinancing a loan? Are you hoping to save money? Do you want a lower monthly payment? A longer payment term? Reduce your interest rate?
There are many things to consider when considering refinancing a loan. It’s always good to do as much research and consulting as possible so you know exactly what you’re getting into and whether this decision will benefit you, or end up being a further financial burden.
