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    Loan Refinance

    Loan refinance refers to the method of modifying a debt repayment schedule. It includes stretching the maturity date. The prevailing loan agreement will be replaced with a new loan agreement with different terms and conditions.

    Reasons for choosing a Loan Refinance

    Let us take a look at some of the common reasons when a person or a business goes for a loan refinance:

    • To clear unsettled dues of other loans and other financial products by consolidating all debts into one loan product
    • To minimise risk associated with loans
    • To enjoy the benefits of a better interest rate
    • To decrease the monthly loan repayment amounts especially in the case of a long term loan
    • To improve tough financial situations when they have to pay fines for late payments
    • To shift from fixed interest rate to an adjustable interest rate or the other way round

    Types of Refinancing

    There are different types of refinancing in India for both personal loans as well as mortgages. Let us take a look at some of the key types of refinancing:

    • Rate-and-term refinancing: Under this type of refinancing, the actual loan amount is fully repaid and then a new loan is given.
    • Cash-out refinancing: Under cash-out refinancing, there is an asset that serves as a collateral. When the value of this collateral increases, the value or equity of the asset will be withdrawn and will be exchanged with a higher amount. You do not have to sell the asset. You only have to gain this higher value by taking a loan.
    • Cash-in refinancing: Under cash-in refinancing, the borrower can clear the loan by paying it at a lower loan-to-value ratio or smaller loan payments.
    • Streamline refinancing: This refinancing helps in making the home refinancing process quicker. This is beneficial if a borrower wants to enjoy the advantages of low interest rates and escape from adjustable rate mortgages or graduated payment mortgages. Adjustable rate mortgages can sometimes be risky as the interest rate can increase drastically. Following this, making such high payments can be very strenuous. Hence, many borrowers choose to get out of these mortgages.

    Car Refinancing

    Apart from refinancing personal loans and home loans, you can also refinance your car loan when required. Let us discuss the situations when you can refinance your car loans:

    • When your credit score has enhanced: At the time of procuring a car loan, if your credit score was poor, it is fine. If your credit score has become better now, you are eligible for lower interest rates. You can now refinance your loan at a lower interest rate so that your repayment becomes convenient.
    • When your car lease is going to lapse: Is your car lease going to expire soon? You may want to buy your automobile now. For this, refinancing is a great option. You can extend your car loan and retain the possession of your car.

    Risks associated with Loan Refinancing

    There are some risks when it comes to loan refinancing. Following are the points to be noted before you go for refinancing:

    • You will have to pay transaction fees for loan refinancing.
    • You will have to pay early settlement fees as a penalty for clearing your loan early.
    • You may have to pay closing fees for loan refinancing.
    • After refinancing a loan, you will bear expenses such as closing costs, prepayment penalties, and the interest of the new loan. These expenses can sometimes be very high compared to the expenses of your old loan. In this case, it is not financially sensible to refinance.

    Top banks offering Loan Refinancing in India

    Following are some of the banks that offer loans in India:

    • SBI Mortgage Loan
    • DBS Refinance Loan
    • HDFC Home Loan Refinance
    • Tata Capital Home Loan Refinance

    With certain precautions, if you keep a track of the various interest rate movements in the nation, you can save extensively when you refinance your loan.

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