You've probably seen ads that tout the benefits of refinancing your home loan at a lower interest rate. But did you know there are other types of loans you can refinance?1
In addition to refinancing your mortgage or home equity loan, you can also refinance an auto loan or personal loan.
Is Refinancing a Good Idea?
There can be a number of benefits to refinancing your debt.
A lower interest rate may save you money. A credit score is one of the factors lenders consider when qualifying an applicant for a loan. If your credit score and overall financial situation have improved since you first took out your loan, you may qualify for a lower interest rate. If you don't extend the term (length) of your loan, a lower interest rate may save you hundreds of dollars over the life of the loan.
Shortening the length of your loan may cut your total interest payments. If you refinance a loan and shorten the length of time you take to repay it, you will save money by paying less interest over the life of the loan.
If your budget is tight, you may be able to lower your monthly loan payments. If you're unable to make your monthly loan payments, you might consider refinancing to extend the length of time you have to pay it off. This will lower your monthly payments, but you will pay more in interest in the long term. Most financial advisors, however, suggest avoiding lengthening the term of your loan if at all possible.
Is Refinancing Good for Your Credit?
A loan refinance may trigger a hard inquiry into your credit history, much like when you apply for a credit card. That means your credit score could be negatively affected initially. But a steady history of on-time payments on your new loan will positively impact your score.2
Make Sure Refinancing Makes Financial Sense for You
In most cases, the goal of refinancing your loan is to get a lower interest rate and save money over the life of the loan. While everyone’s situation is different, take the time to review your goals and make sure that any new loan you consider helps you achieve it.
1 Before you refinance your existing balance to obtain additional money, you should carefully consider the advisability of increasing your debt, your monthly obligations and the term of repayment. The overall cost of refinancing an existing balance may be greater than the cost of separate financing, if it is available.
*This article has been updated from its original posting in January, 2014.