When you have big dreams and ambitions, one thing often stands in your way: money. For instance, owning a house is a sensible and more secure alternative compared to paying rent all your life; the only problem is that homes cost a lot of money and you might not be able to save up for them within a short period. The same applies to many other assets. It is logical to go for a financing option that helps you acquire the asset immediately and pay for it over a long period. If you are on your first credit facility, the following information will teach all you need to learn about refinancing:
In financing and banking, refinancing refers to an option where the borrower takes up a new loan to pay off an old existing loan. For instance, if you have an existing car loan, you can take a new loan to pay off the old loan and begin a new repayment plan.
The world of lending has numerous justifications for you to consider a refinancing option. First, you can go for refinancing if you find a lender with better terms who allows you to apply for a new loan. Secondly, your new loan can repay your old debt and leave better off financially. Refinancing works for most typical loans such as car loans, mortgages and study loans.
A borrower needs to understand the concept of refinancing risk before settling for a refinancing option. Primarily, refinancing risk refers to the possibility that a borrower will not be able to borrow and refinance a debt that he or she currently owes. The risk occurs when you have a liquidity problem, meaning that you cannot convert your assets into cash fast enough to pay your debt obligations. When assessing your relative refinancing risk, lenders often evaluate the following things:
- The possibility of a decline in your credit quality. Your credit quality can decline because of a decrease in your income or other loan obligations that you have.
- The possibility of a change in market conditions. For instance, you have a higher refinancing risk if you run a business in a highly volatile industry such as a casino.
Benefits of Refinancing
Refinancing has several benefits. First, it saves you money on interest charged. You can only refinance by taking a loan with a lower interest. Secondly, you can change to a loan with a fixed rate and protect yourself against fluctuating interest rates.