What is Loan Refinance? - Types, steps & benefits

Personal Loan refinancing means replacing your current loan with a new one, possibly featuring better interest rates or repayment terms. This might prove beneficial if you want to extend the repayment period or improve your credit score. Personal Loan refinance is a smart move if you are looking to save money.

What is loan refinancing?

Loan refinancing is the process of replacing an existing loan with a new one, typically with better terms.

For example: Roshan Mathew is a year into a Personal Loan with a steep 13% interest rate. By refinancing, he is likely to get a lower interest rate. This not only reduces his monthly payments but also the total interest paid over the life of the loan.

This strategy is particularly beneficial for borrowers who have improved their credit scores or when economic conditions push interest rates down. For Roshan, Personal Loan refinance could mean significant savings and a more manageable financial situation.

Steps to refinance a Personal Loan

• Check for lenders offering an attractive rate of interest
  Keep an eye out for a lender who offers more attractive interest rates than your current one, which could lead to considerable savings. A lower interest rate could mean lesser interest paid over time, making refinancing a financially sound decision.
• Calculate your requirement
  Calculate the total amount needed to pay off your current loan. This amount should include any possible fees or penalties for early closure of the current Personal Loan. This calculation will inform you of the new loan amount you should apply for, ensuring that it completely covers your refinancing needs.
• Check your credit score
  If your creditworthiness has increased since you took out your current loan, you are likely in a position to negotiate better terms. Lenders offer more favourable interest rates to borrowers with higher credit scores, recognising their lower risk profile and responsible credit management.
• Discuss with your current lender
  Engage in a conversation with your existing lender about refinancing options. They may offer competitive refinancing rates or terms to maintain your business, which could be more convenient than starting afresh with a new lender.
• Choose a new lender wisely
  If you decide to find a new lender, research thoroughly. Consider not just the interest rate but also loan terms, additional fees, and customer service quality. Choosing a lender that aligns with your financial goals is key to a successful refinancing experience.
• Apply for your refinance loan
  With all the necessary information and a chosen lender, you can proceed to apply for the refinancing loan. Ensure all your documents are in order, as complete and accurate information can streamline the approval process and lead to faster refinancing benefits.

Types of refinancing

• Rate-and-term refinancing
  This type involves changing the interest rate, the term, or both, of the existing loan, without affecting the principal amount. For example, if you initially had a loan at 12% over five years, rate-and-term refinancing might allow you to change to a loan at 10% over three years, potentially saving you on interest and shortening your payment period.
• Cash-out refinancing
  A borrower refinances their loan for more than they owe and takes the difference in cash. This is beneficial for those who need extra funds for other expenses or debt consolidation. Say your loan balance is ₹1 lakh, but you qualify for a loan of ₹1.5 lakh; you can refinance and receive ₹50,000 in cash, which can be used for other expenses.
• Cash-in refinancing
  This type of refinancing involves the borrower making a large payment to reduce the balance of the existing loan, which can result in lower monthly payments, a shorter loan term, or both. You might opt for cash-in refinancing if you have a lump sum of money that you want to use to lower your loan balance. For instance, if you owe ₹2 lakh, you could pay ₹50,000 into your loan and refinance the remaining ₹1.5 lakh.
• Streamline refinancing
  This is a simplified refinancing process designed for those who wish to refinance without the extensive paperwork or appraisal requirements. Streamline refinancing is often available to borrowers who have been consistent in their loan repayments and may not require a credit check.

Pros of Personal Loan refinancing

• Lower interest rates: Refinancing could lock in a lower rate, reducing the overall cost of your loan.
• Reduced monthly payments: With a lower rate, your monthly outlay could decrease, easing your budget.
• Adjustable repayment terms: You might find a term that better suits your financial timeline, be it shorter or longer.
• Debt consolidation: Refinancing allows you to consolidate multiple loans into one, simplifying repayments.
• Improved cash flow: If you opt for a longer loan term, you'll have more disposable income monthly.

Cons of Personal Loan refinancing

• Closing costs and fees: You may face prepayment penalties or origination fees, adding to the cost.
• Longer repayment period: Extending the loan term could mean more interest paid over time.
• Risk of over borrowing: Cash-out refinancing might tempt you to borrow more than necessary, increasing debt.
• Credit score impact: Applying for a new loan may cause a temporary dip in your credit score.
• Lost benefits: You may forfeit certain benefits from your original loan, like fixed interest rates or rebate options.

Conclusion

Refinancing your Personal Loan can streamline your finances, offering lower interest rates and reduced monthly payments. Axis Bank’s Personal Loan refinancing options, with loans up to ₹40 lakhs and rates from 11.25% p.a., provide flexibility and convenience. Paperless online process and swift approvals make it a prime choice for those looking to optimise their loan terms. Consider Axis Bank for a refinancing solution that can be tailored to your unique financial needs.

Also Read: Understanding how a loan repayment schedule works

FAQs

Can I refinance my Personal Loan from another bank?

Refinancing your Personal Loan from a different bank is possible and recommended to secure more favourable repayment terms.

Is it good to get your Personal Loan refinanced?

Refinancing your Personal Loan is usually beneficial when it reduces interest rates, lowers monthly payments, or adjusts the loan term to suit your financial situation better.

Is it good to get your Personal Loan refinanced after a year?

Choosing to refinance your Personal Loan after one year could be strategic, especially if you qualify for significantly lower interest rates or better loan conditions.

Does your credit score drop if you refinance your Personal Loan?

Refinancing a Personal Loan may lead to a temporary decrease in your credit score due to the lender's credit check, but it typically recovers over time, if you pay your EMIs on time.

How many times can I get my Personal Loan refinanced?

There's no set limit to how often you can refinance a Personal Loan, as long as each refinance is financially justifiable and improves your loan terms.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.