Personal Loan Refinance

1. A lender is offering an attractive rate of interest - It is a good idea to refinance your personal loan if you feel that the interest rate charged by your existing lender is high and another lender is offering a good bargain on the interest rate. A lower interest rate would translate to you having to pay lower EMIs each month.
2. Your income has increased substantially - If there is a significant increase in your monthly income, you may want to clear off your loan liabilities quickly. In such cases, you can choose to shorten the tenure of the loan by opting for a loan refinancing.
3. Your credit score has improved - Many times lenders may offer you good deals on interest rates, processing fees, etc., if there has been an improvement in your credit or CIBIL score. In such cases, you can refinance your personal loan to avail better loan terms.
4. You wish to extend the repayment tenure on your loan - Financing on your personal loan can be done when you wish to extend the repayment tenure on your loan so that your monthly EMI gets reduced.
5. Add or delete a co-applicant from the loan - You can refinance your personal loan if you have to add or delete a co-applicant from your loan account. When you refinance your loan, you will have a new set of terms and conditions which is when you can add or delete a co-applicant.

Types of Personal Loan Refinance Options

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:

1. Rate-and-term refinancing: Under this type of refinancing, the actual loan amount is fully repaid and then a new loan is given.
2. 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 When the value of this collateral increases, the value or equity of the asset will be withdrawn and will be exchanged with a higher amount.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.
3. 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.
4. 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.

Things to Remember When Refinancing Your Personal Loan

1. Be aware of the balance transfer charges before you decide to opt for the same. When you refinance a loan, you will have to pay the foreclosure charges applicable to your existing bank and documentation fee, processing fee, etc., to the new bank. Evaluate if the savings on loan refinance exceed the additional costs incurred. If the difference in costs is marginal, sticking to the existing loan is a better thing to do.
2. Ensure you have a healthy credit score before deciding to refinance your personal loan. If you have a credit score below 600, there are high chances of banks rejecting your loan refinance request. Even if they agree to refinance, they may charge a high rate of interest which then defeats the whole objective of refinance which is to lower the cost of the loan.
3. Understand that a loan refinance will offer significant benefits only when you are in the early stages of repayment. For instance, if your loan tenure is 5 years, refinancing will make sense only if you have made repayments for less than 3 years. This way you will get enough time to reap maximum benefits out of the refinance.
4. Since refinancing means a new loan altogether, your new lender will ask you to submit documents such as your identity proof, latest bank statements, proof of income, etc. Ensure that you keep all the documents ready before you approach your new lender for refinance.
5. Go through the loan balance transfer documents carefully before you decide to opt for refinancing. Doing so will ensure that you do not miss out on any vital information related to the balance transfer. If you are not clear about any clauses in the loan document, you should ask the bank officials to clear your doubts.

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