Refinancing means replacing your existing loan from an authorised money lender with a new one with better terms and conditions. If you can negotiate a lower interest rate, you can have lower monthly payments and a shorter loan term, or a payment schedule that would match your current cash flow. This could help especially when you are having difficulties in complying with due dates and deadlines.
On the part of the lender, refinancing is a way to re-evaluate the credit standing of the borrower and check if the current terms are still working. This is crucial especially when there are missed payments. After all, at the end of the day, the goal is for the loan to be paid.
However, as with many good things, there are times when refinancing is not the best idea. Here are some of them:
High Refinancing Costs
Of course, there are costs. These often come in the form of origination points and application charges. Most lenders charge fees for those who want their loan terms to be re-evaluated. If the decrease in interest or monthly payment is minimal, there is a possibility that the refinancing fees are more costly.
Ask your lender for a computation before applying for refinancing. If there are no outright costs or fees, this might mean the additional fees are factored in your new monthly payment or there are taxes and penalties that are not explicitly listed in your term sheet.
When You Are Almost Done Paying Your Loan
Keep in mind that when you re-negotiate the terms, the length with which you are expected to pay the loan often restarts. Unless you and the lender agreed to a shorter loan term, this would mean more years being saddled by a financial obligation. It would be a mistake if you were already approaching full loan payment. In such cases, it would be best to keep the original terms.
Make sure you have factored in this possibility before applying for debt refinancing and paying any processing fees. Be transparent with your lender about your purpose for the term re-negotiation and ask for assistance whenever possible.
You Have an Unstable Income
If you do not have a stable source of income, re-negotiating the terms of your loan might not be beneficial on your part. After all, one criterion lenders consider is your ability to continue the payments under the new terms. So if your income is currently unsable, your lender will be hesitant to change the terms, knowing that you’re likelier to default.
If you request for a more aggressive payment scheme to shorten the term of your loan, your lender might not be convinced if you do not have a steady source of funds. On the other hand, if you asked for a longer term, it might also raise concerns as to how you are planning to sustain regular payments.
Your Loan Has A Pre-payment Penalty
Since refinancing might result in lower interest rates which will decrease the profit that the lender will get from the loan, some lenders charge a pre-payment penalty. This will discourage borrowers from paying the loan early on and will get them to keep paying interests.
Same with origination fees, make sure to compute how much you will really save by renegotiating your loan. Will these savings outweigh the pre-payment costs? Or will it be the same anyway. Re-negotiating terms is not a walk in the park. You will have to expect pushback from your lender. Are you willing to got through all that for a new loan term?
You Might End Up In More Debt
Ask yourself how you will use the funds freed up in case your refinancing application gets approved. Will you apply for another loan? Are you looking for a Toa Payoh money lender to finance a new project or a business idea?
Come up with a concrete plan to avoid falling into the trap of thinking you have extra funds you can spend on anything you fancy. This might easily snowball into a spending frenzy that will leave you in more debt and stress.
Refinancing Your Loan Can Be A Good Strategy
Like with most loan options, refinancing a loan can either be beneficial to you or can lead you deeper into debt. While it is tempting to ask for a re-negotiation of loan terms especially when the prevailing loan interest rates are lower than when you first applied for one, do not blindly jump on the opportunity. Evaluate your reasons for asking for new terms, and assess your current situation and if the terms have become difficult for you to handle. Finally, come up with a plan on how you will be able to pay your loan in case it will be for a longer term.
