You've probably seen ads that tout the benefits of refinancing your home loan at a lower interest rate. But did you know that there other types of loans you can also refinance?
In addition to refinancing home mortgages or home equity loans, you may also be able to refinance your:
- Auto loan
- Student loans
- Personal loans
The Advantages of Refinancing
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 may consider when qualifying an applicant for a loan and a significant improvement in your credit score may help you qualify for a lower interest rate. If your credit score and overall financial situation have improved significantly since you first took out your loans, you may now qualify for a lower interest rate on a new loan. 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, you will also save money by paying less interest over the life of the loan.
- If your budget is too tight, you may be able to lower your monthly loan payments. If you're having real trouble making your monthly loan payments, you might consider refinancing the loan and extending 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.
The Basics of Loan Refinancing
- The first step in the process of refinancing a loan is to do some research. Check the rates at your local banks and credit unions, as well as searching online. Once you know what rates are available, figure out how much you could save by refinancing. You can use an online calculator or ask the bank to run a savings estimate for you.
- Find out if you'll be charged any extra fees for the new loan, like an application fee, for example.
- Review the paperwork from your original loan. Check to see if there are any penalties for paying off your loan early.
- Make sure you have all the documents you need for the refinancing, such as your vehicle title if you're refinancing an auto loan, and your original loan documents.
For student loans, the decision and process can be a little more complicated. If you have government loans, refinancing may mean you lose the benefits like income-based repayment, interest rate discounts and loan cancellation benefits. If you have private student loans, the considerations around refinancing are similar to when you're refinancing a personal loan.
Make Sure Refinancing Makes Financial Sense
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. Make sure that any new loan you consider helps you achieve that goal. If possible, continue to make your previous higher monthly payments and pay off your loan more quickly or put the money you save each month into your emergency savings fund.