The Pros And Cons Of Refinancing

The Pros And Cons Of Refinancing

More and more people are taking the option to refinance their debts and various loans into a single loan in order to manage their debt better. It means just one monthly payment instead of several and in some cases can save you money. But before you take up the option, make sure you know what's involved.

The Advantages Of Refinancing Your Debts

Refinancing a loan or a range of debts has several advantages and is often a more practical way of managing you financial obligations, especially if you find you are struggling. Refinancing allows you to:

  • Extend you repayment time
  • Reduce your monthly payments
  • Reduce compiled interest rates
  • Improve your overall cash flow

By refinancing your debts you can alter the amount owing on your periodic payments as it allows you to change your interest rates and alter the time frame for the length of the loan period. It will also allow you to compile your debts into one which means you only have one loan to repay and interest on that loan only. In some cases you may be able to reduce your overall borrowing costs.

The Risks Of Refinancing

There are some risks involved in refinancing though and these are worth noting. Many fixed term debts have a 'penalty clause' attached to them and are activated if you make an early or additional payment on your loan or if you decide to pay it out completely at an earlier date than the fixed term.

It's also worth noting that there are usually transition fees associated with refinanced debts. In some cases the savings you make via the refinancing of your debt are lost as a result of these fees. Because of these fees and penalties it is often a good idea to source the viability of refinancing your loans. If it's going to genuinely save you money and allow you some breathing space, refinancing may be the best option for you.

Bear in mind that lenders often ask for an upfront payment which is usually a percentage of the total loan amount. This is something you would need to discuss with your lender as there are several combinations involved in this 'points' system. Sometimes it will work in your favour but sometimes not.

Your personal situation should be your best guide when considering refinancing your debts.

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