The current pandemic has led most people into skipping personal loan repayments.
Loss of jobs affected millions of Filipinos such that the state-run Credit Information Corp (CIC) continuously urges banks and lenders not to tag missed payments as delinquent.
The government further enacts the Bayanihan 2 into law extending debt relief programs with 60-day grace periods.
But things could be different if your loans are raking high-interest rates. You end up enjoying the debt relief grace periods but your debts remain unsettled for a long time.
What is personal loan refinancing?
Personal loan refinancing is the same concept as debt consolidation. You apply and take out a new loan to pay off your existing loan. Debt consolidation could cover all your existing balances including credit card debts, car loans, and home loans. For personal loan refinancing, you can opt to cover loans of your choice.
The goal is for you to end in a personal loan that offers better interest and repayment schemes.
Loan refinancing is a choice most borrowers make to get a more affordable loan. For example, a personal loan taken 12 months ago was offered a 12% interest per annum. Today, the same loan is offered at 8-10% per annum. If that is the case, then refinancing an old loan with a more affordable one is a practical decision.
When should you refinance a loan?
You can apply for a new personal loan as long as you have a good credit score. That is if you have been consistently paying your installments in full and on time. However, you should always think twice when taking out a loan because there are certain situations you should consider before applying.
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Refinance an existing loan if the offer will have a lower annual percentage rate over your old loan. You can also consider switching from a variable rate loan to a fixed-rate loan so you can take advantage of consistent installments each month.
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It is time for refinancing when your income has decreased and you can no longer afford your existing installments. Banks offer loan refinancing in connection to the massive loss of jobs that occurred during the pandemic. Refinancing can let you choose a loan that requires a repayment you can afford.
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Refinance an existing loan if the loan offer will prevent your debts from piling up. Some refinancing may have hidden charges which you may not be aware of. Having said that, you should not only focus on the interest rates but also on the cost of processing and other fees entailed with the new loan.
What are the pros and cons of refinancing?
Not all financial facility works best for borrowers. If you compare personal loans online, you will see how to offer doffer from one lender to another that will affect the impact of refinancing your existing loan. Here are a few advantages and disadvantages you should be aware of:
Advantages:
1. Lower interest
Most lenders offer dropped rates especially in times of crisis. Refinancing has the potential to reduce your debts and save more money on interest and fees.
2. Extend your loan tenor
With a refinancing, you are refreshing an existing loan while also extending its tenor. This will make everything more manageable considering that you can reduce your debt while allowing more time for you to acquire money for repayment.
3. Payment stability
Most loan refinancing offer a change from a variable rate to a fixed rate. That means more stability in terms of the repayment amount. This can help you plan your finances ahead of time.
Disadvantages:
1. Extra costs
Certainly, the annual percentage rate for new loans can seem lower but some lenders may impose other fees. Processing fees can be a one-time charge which could be higher than the interest charges you’re paying for the old loan.
2. Early repayment charges
Some lenders charge early repayment fees when closing off loans ahead of the term. If the charges are much lower than the total cost of your new loan, then refinancing can be right for you. On the other hand, if all fees entailed closing an old loan and opening a new one, then you might want to consider staying with your current lender.
3. Higher interest
This might seem confusing but a new loan may cost much higher interest in the long run. Refinancing will let you apply for a loan at a much longer-term. Over time, an extended loan will be equal to higher interest costs. More often than not, a new loan will have a much longer-term than your existing loan.
What to consider before refinancing?
The advantages and disadvantages are important factors to consider when deciding whether to refinance a personal or not.
On the personal side, you should also check your income and your credit profile. Your income is important in calculating how much could you spare for loan repayments. It will help decide which loan to take especially when you’re up to reducing the monthly installments. Moreover, your credit profile is an essential consideration, especially for lenders.