As you might be aware, federal interest rates are at an all time low. Incredibly, they're expected to get even lower in the wake of the recent stock market crash and fears about the impending coronavirus epidemic.
In other words, there's never been a better time to refinance a loan.
Refinancing loans sounds like complicated financial strategy, but it's actually pretty simple. All you're doing is getting a new loan that covers the balance of your old loan. If your financial situation has changed or the federal government has lowered their interest rate substantially, you might be able to get more beneficial terms.
Refinancing a loan isn't a cure-all, though. While it does offer several advantages, refinancing a loan also has some disadvantages of which you'll want to be aware.
Pros of Refinancing a Loan
When you refinance a loan, you're replacing your old loan with a brand-new one. This can have several benefits.
First, you can get a lower interest rate. Loans with high interest rates, such as credit card balances, can cost you a lot of money over the life of the loan. Getting a loan to cover your credit card debt can potentially save you hundreds, if not thousands, of dollars.
You can also save money on other loans as well. Refinancing a high interest loan on your house or car can also save you a lot of money.
Refinancing a loan can also help you consolidate your debts. If you have multiple debts, consolidating them into one loan can not only save you money, it can also make keeping track of payments easier.
Finally, refinancing a loan can also reduce your monthly payments. Whether you're extending the time you have to pay off the loan or getting a lower interest rate, refinancing your loan can add more money back to your budget that you can use for more immediate expenses.
Cons of Refinancing a Loan
While refinancing a loan can have a lot of advantages, it's not always the smartest move you can make. In some cases, you might even end up paying more than you had before you refinanced if you're not careful.
The biggest con of refinancing a loan is that you might lose some important benefits. This is especially true in the case of student loans.
Federal student loans offer a lot more flexibility than private student loans, and they are very willing to work with borrowers to help them in times of financial hardship. They may also be willing to partially forgive your loans if your career is public-service based.
You'll also want to make sure you don't refinance a fixed-rate loan with a variable rate loan. You might get a lower interest rate initially, but if the variable rate shoots up, you might quickly find yourself underwater.
Speaking of interest, refinancing a loan might actually give you a higher interest rate instead of a lower one. This is more likely to happen if you extend the life of your loan. If you need to stretch out your debt, you might get a lower monthly cost, but be aware that the cost might be offset by having to pay off the loan longer.
Finally, if you're refinancing a home loan, you may need to pay some of the outstanding principal, including the fees you paid for the application, appraisal, origination and inspection. You may also have to pay the closing costs, which may total thousands of dollars.
Refinance Your Loans the Right Way With First Alliance Credit Union
Refinancing a loan can help you get ahead financially, but you have to be smart about it. If you don't, you might end up paying more than you would had you stuck with your original loan.
If you have questions about refinancing a loan, contact a First Alliance Credit Union loan expert today. They can help you determine if refinancing is best for you and help get you the best possible interest rate on your loan.