The word “refinancing” conjures up images of cheesy, sleazy TV and radio ads purporting to bring you a ton of savings. Refinancing has traditionally been associated with mortgages, as housing debt makes up almost 75% of consumer lending (see NY Fed). With interest rates at historic lows for the last few years, banks and other financing providers have taken advantage of the great rate at which they themselves can borrow, allowing them to sell consumers new loans at lower rates. As a result, they benefit from new customers and a wealth of fees that come with the origination of new loans. Despite some costs associated with refinancing and the questionable advertising, refinancing does have its merits when considered carefully, and not just for mortgages.
Refinancing reduces the interest you pay on your loan(s)
Refinancing helps consumers save money by lowering the rate (and often, improving other terms) on their existing debt, reducing monthly payments or allowing them to pay off the loan more quickly. Changes in just a percentage point or two over the life of a loan can result in meaningful savings. For instance, for a $20,000 loan at 4% interest compounded monthly would take a monthly payment of $443.08 to pay off in 4 years. However, at 6% interest, that same loan with that repayment schedule would still carry a balance of over $1,000 at the 4-year mark. This opportunity for savings grows as the loan terms (years) and loan sizes ($$) of these refinanceable sums increase.
Refinancing doesn’t just apply to home loans
Student loan refinancings are picking up. Lenders have picked up on the fact that federal student loan rates are the same no matter who you are or what your credit history is. The government doesn’t adjust rates for factors such as graduating from a great school or landing a solid, new job. While government-subsidized rates have helped many gain access to education, there are many people with very low default risk who deserve better rates.
Watch out for fees and other costs
Many refinancing opportunities come with a host of fees, ranging from origination fees (often a percentage of the debt being financed), application fees, and for home loans, costs to cover inspections, appraisals, and insurance. Do your research ahead of time to ensure that a new lender won’t charge you an arm and a leg.
Don’t fall prey to inertia
Inertia is the biggest roadblock stopping consumer from reaping the benefits of refinancing. Once borrowers have accepted the terms of their loans and have gotten into a steady cycle of repayments, it’s easy to continue making those payments and not face what seems like a lot of work and pushing paper to save an unclear amount of money by refinancing. Banks love this inertia: even if market rates have gone down or there are other reasons that a borrower deserves a lower rate, banks count on the overwhelming majority of customers to stay put and not demand better terms.
The market is constantly changing and you are constantly changing. When things change for the better in the form of market interest rates declining or you lowering your default risk (e.g., the value of your home increases, landing a new or better job), you deserve better terms, especially on something that adds up as quickly as interest payments over time. The more debt you carry, the more benefit you will gain from refinancing. It’s always a good time to shop around to see what your options are, whether you’re only a year or two into your loan or a year or two from paying it off.
WeFinance is a free platform for crowdfunding loans and can be used to access the lowest possible rates for refinancing existing debt or taking out new debt. Find out more at http://www.wefinance.co