New to the World of Loans? Let's Talk About Refinancing!

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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:

Refinancing Explained

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.

Refinancing Risk

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.