4 Benefits of Refinancing a Loan

iQuanti: If you're looking to streamline your finances and lower your expenses, refinancing your loan may be a good path. Refinancing involves taking out a new loan to pay off and replace an old loan with better terms, which provides several benefits. Here are some of the most significant advantages of refinancing a loan.

1. Scoring a Lower Interest Rate

One of the primary reasons people refinance loans is to get a lower interest rate on their debt. Interest can cause you to spend a lot more while paying back your loan, so refinancing to a loan with a lower rate could decrease the amount of money you'll have to pay.

Refinancing can be beneficial when dealing with cash advances and title loans. These tend to have higher interest rates compared to traditional loans, even if the loan is for a small amount. Refinancing can help you successfully pay off the loan and pay less interest.

2. Lowering Your Monthly Payments

Refinancing often helps you secure a lower monthly payment as well — and not just because of the lower interest rate. If you refinance your loan, you may have the option to extend the loan term since you're taking out a brand-new loan. Additionally, your refinancing loan will be for the reduced loan amount (since you've already paid down some of the original loan).

For example, imagine you paid down a five-year, $5,000 loan to $2,500 over 2.5 of your 5 years. Then you refinance with a five-year, $2,500 loan at a lower rate. As you can see, your new payment would be half of your old payment amount (before including interest), providing you with more room in your budget each month.

3. Consolidating Your Debts

Consolidating your debt means combining several loans or credit balances into one. It involves taking out one large loan to pay off other debts, then making payments on that new loan. Consolidation can be helpful if you're juggling several installment loans at once. By combining all your loans into one, you'll only have to manage one payment every month. 

As a result, you will be less likely to forget to pay one of your debts, avoiding fees and penalties. Plus, it may be easier psychologically to focus on one debt as opposed to several. That said, you should make sure that your new loan's interest rate is lower than the weighted average interest rate of all your old debts.

4. Getting a Larger Loan Amount

Refinancing can even help you get additional funds if you need some extra cash. You may be able to take out a larger loan than the existing loan you're refinancing to meet your financial needs.

Refinancing to get a bigger loan is fairly common among homeowners, since this can give them a significant sum of money useful for home renovations, funding children's college education, bolstering retirement savings, and more. Many lenders may also let you get a larger loan amount when you refinance loans like cash advances, installment loans, and title loans. If you have multiple debts, you can follow a similar process when refinancing by taking out a larger loan than the total of your other debts.

The Bottom Line

Refinancing can be an excellent financial move if you feel burdened by debt. It could cut your interest rate, lower your monthly payment, combine your debts into one manageable monthly payment, and help you secure additional funds. As with any loan, make sure you shop around for the right offer to maximize these benefits.

Notice: Information provided in this article is for information purposes only. Consult your financial advisor about your financial circumstances.

Source: iQuanti, Inc.

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Categories: Personal and Family Finances

Tags: debt, financial services, loans, personal finance, refinancing