Refinancing a personal loan implies paying off an existing loan with a new one that offers better interest rates or lower monthly payments. It is usually done when borrowers feel that they cannot bear the burden of their high equated monthly instalments (EMIs), the interest rate on their existing loan is too high or simply because another lender is offering lower interest rates.
Personal loan refinance helps you save money with lower interest rates, lower fees, and better loan terms. You can also refinance your Loans to shorten the loan tenure so that you can save up on the interest in the long run. When you opt to refinance your personal loan, the new lender will take over the loan from your current lender and hence, all the future EMIs will have to be paid to the new lender.
A lender is offering an attractive rate of interest – It is a good idea to refinance your personal loan if you feel that the interest rate charged by your existing lender is high and another lender is offering a good bargain on the interest rate. A lower interest rate would translate to you having to pay lower EMIs each month.
Your income has increased substantially – If there is a significant increase in your monthly income, you may want to clear off your loan liabilities quickly. In such cases, you can choose to shorten the tenure of the loan by opting for a loan refinancing.
You wish to extend the repayment tenure on your loan – Financing on your personal loan can be done when you wish to extend the repayment tenure on your loan so that your monthly EMI gets reduced.
Add or delete a co-applicant from the loan – You can refinance your personal loan if you have to add or delete a co-applicant from your loan account. When you refinance your loan, you will have a new set of terms and conditions which is when you can add or delete a co-applicant.
There are different types of refinancing in India for both loans as well as mortgages. Let us take a look at some of the key types of refinancing:
Rate-and-term refinancing: Under this type of refinancing, the actual loan amount is fully repaid and then a new loan is given.
Cash-out refinancing: Under cash-out refinancing, there is an asset that serves as a collateral. When the value of this collateral increases, the value or equity of the asset will be withdrawn and will be exchanged with a higher amount. You do not have to sell the asset. You only have to gain this higher value by taking a loan.
Cash-in refinancing: Under cash-in refinancing, the borrower can clear the loan by paying it at a lower loan-to-value ratio or smaller loan payments.
Streamline refinancing: This refinancing helps in making the home refinancing process quicker. This is beneficial if a borrower wants to enjoy the advantages of low interest rates and escape from adjustable rate mortgages or graduated payment mortgages. Adjustable rate mortgages can sometimes be risky as the interest rate can increase drastically. Following this, making such high payments can be very strenuous. Hence, many borrowers choose to get out of these mortgages.
Be aware of the balance transfer charges before you decide to opt for the same. When you refinance a loan, you will have to pay the foreclosure charges applicable to your existing bank and documentation fee, processing fee, etc., to the new bank. Evaluate if the savings on loan refinance exceed the additional costs incurred. If the difference in costs is marginal, sticking to the existing loan is a better thing to do.
Ensure you have a healthy credit score before deciding to refinance your personal loan. If you have a credit score below 600, there are high chances of banks rejecting your loan refinance request. Even if they agree to refinance, they may charge a high rate of interest which then defeats the whole objective of refinance which is to lower the cost of the loan.
Understand that a loan refinance will offer significant benefits only when you are in the early stages of repayment. For instance, if your loan tenure is 5 years, refinancing will make sense only if you have made repayments for less than 3 years. This way you will get enough time to reap maximum benefits out of the refinance.
Since refinancing means a new loan altogether, your new lender will ask you to submit documents such as your identity proof, latest bank statements, proof of income, etc. Ensure that you keep all the documents ready before you approach your new lender for refinance.
Go through the loan balance transfer documents carefully before you decide to opt for refinancing. Doing so will ensure that you do not miss out on any vital information related to the balance transfer. If you are not clear about any clauses in the loan document, you should ask the bank officials to clear your doubts.
FAQs on Loan Refinance
Yes, if your current bank from whom you availed the loan does not offer the option to refinance, you can approach another bank to get your personal loan refinanced. Is it good to get your personal loan refinanced?
Refinancing your personal loan might be an option to consider if the current interest rates have dropped below the interest rates levied on your loan, or if you are looking to extend your repayment tenure. Is it good to get your loan refinanced after 1 year?
You can get your personal loan refinanced anytime you see that your interest rate can drop down anything between 0.5% and 2% or even more. Hence, get your personal loan refinanced only if you realize that the interest rate charged will be lower than what the lender is charging you currently. Does your credit score drop if you refinance your personal loan?
Your credit score will drop a bit if you choose to refinance your personal loan. However, in the long run your credit score will rise if you repay all your loans on time. Is there any other way to get my interest rate reduced on my personal loan?
You can contact your bank and ask them to consider reducing your interest rate provided you have a good relationship with them. If you have been an existing customer of the bank for a long time, then there is a possibility they may consider lowering your interest rate. If you maintain a good credit score, then the possibility of the bank lowering your interest rate increases. How many times can I get my personal loan refinanced?
It is not always a very good idea to get your loan refinanced every time. However, if the bank has no problem and you can repay the loan amount on time, then you can get your loan refinanced as many times as you want.
Yes, if the bank feels that you will not be able to repay the personal loan amount on time, or if your credit score is extremely low, then they are well within their rights to reject your application for a personal loan refinance.Can I get a personal loan refinance to pay my home loan?
Yes, you can get a loan refinance to repay your home loan.