Should You Change Your Loan Term During a Refi?
NEW YORK, July 26, 2022 (Newswire.com) - iQuanti: When you refinance, your lender essentially pays off your old loan with a new one. Refinancing can give you the opportunity to secure more favorable conditions for your loan.
Getting a lower interest rate is a significant factor, but there's another big consideration involved: your loan term, or the specific length of time you have to pay off your debt. It's every bit as important as your interest rate, so you'll want to pay close attention to whether your new loan's term makes sense financially.
Benefits of changing your loan term
If you recently got a new job or your finances improved in some way, you may be in a position to secure better conditions for your loan, like a lower interest rate or a shorter-term loan. A shorter-term loan could have you making larger payments but could get you a better rate and pay off the loan in less time.
Conversely, a longer-term loan can lower your monthly payments, alleviating the loan's immediate impact on your monthly finances. Keep in mind that the length of your loan term won't just affect your monthly payments, but the interest rates your lender offers you as well.
If you're looking to refinance student loans, see if your lender offers incentives for refinancing—these can help the savings add up even more quickly.
Drawbacks of changing your loan term
On the other hand, if you change your loan term without considering all factors, you might wind up regretting it. Your lender will offer you various repayment timelines—make sure you work out the cost in interest of each.
When calculating total interest, don't forget to consider how much you've already paid into your old loan. Even with a lower interest rate, resetting the clock on your loan can end up costing you.
Refinancing to reduce your payments while lengthening your payment schedule could result in you paying thousands more in interest over the course of the loan. As tempting as those lower monthly payments might be, be sure to calculate how much you'll end up paying before you commit.
Is changing your loan term worth it?
Whether you should change your loan term depends on your financial situation. A longer loan term will likely mean you'll be making smaller monthly payments, putting you under less immediate financial pressure and freeing up your money for use elsewhere. A shorter loan term will likely mean you'll be making bigger payments, but you'll pay it off earlier and pay less interest in the end. Whichever you choose, make sure your loan term isn't an afterthought when you refinance your debt.
Source: iQuanti, Inc.