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Loans Refinancing: Understanding Nuances and Advantages

Submitted by admin on November 22nd, 2023

In a nation aspiring to be a global economic superpower, the Indians should understand the nuances of loan refinancing to strengthen their personal finance strategy. If planned properly, it will help borrowers in building their wealth over time.

The Reserve Bank of India changes the repo rate from time to time and the action inflicts heavy influence on the commercial banks’ decisions related to interest rate. A reduced repo rate provides borrowers with an opportunity to restructure their existing loans at a new interest rate, which will help them save a great deal of money over the loan’s tenure. On the other side, an increased repo rate will result in higher interest rates, prompting borrowers to rethink their financial strategies.

How Can It Affect Your Personal Finance? 

You may be looking for reduced EMIs on your home or car purchase loan or whatever reason you have taken out a loan for. In each of these cases, having a fair understanding of loan refinancing is important, especially in the context of changing repo rates.

Let us take a closer look at loan refinancing and how you can use it to strategize your financial move.

Loan Refinancing: An Idea

Loan refinancing is an accepted and applied financial strategy that allows a borrower to replace an existing loan with a new loan or consolidate multiple loans in a single loan under some favourable terms.

Obtaining a lower interest rate is the primary objective of loan refinancing. A reduced interest rate will cut down on your overall borrowing cost. However, the advantages of refinancing are not limited to only lower interest rates and also include repayment flexibility, long-term savings and better loan management.

With loan refinancing, you get a new loan to pay off your existing loans. The new loan will come with new terms and conditions which usually include a lower interest rate, a change in interest rate type (for example, from variable to fixed), and a different tenure.

Rate-and-Term Loan Refinancing

It is a typical form of loan refinancing. Most people, who are keen on refinancing, choose this option. With it, you will have the flexibility of modifying interest rate, loan tenure or both. In essence, you are switching to a new loan for favourable interest rates and other conditions, though the principal remains unchanged.

Why Should You Consider It?

There are a number of reasons that may compel you to take out a new loan in place of your existing loan or loans.

Lower Interest Rate: A favourable change in the market condition since you borrowed your loan or an improved credit score may help you secure a lower interest rate. If your request is granted, it will help you save a significant amount.

Monthly Payment Flexibility: By switching to a new interest rate or loan term, you can adjust your monthly repayment size in a way that it is more manageable.

Flexible Loan Terms:

Uncertainties are a part of our life. There is no way to guarantee if you will be able to maintain the present standard of living after a decade. Rate-and-term loan refinancing will enable you to shorten and extend your loan tenure according to what suits your current financial situation and future goals.