Get to know more about Refinancing Loans
Advantages and Disadvantages of Refinancing Loans
What is a Refinancing Loan? What are
the benefits?
Refinancing is usually every financial institution has a basis in determining the maximum limit of debtor’s installments, which is equal to 30% of their income, either individually or collectively (in pairs). However, in reality, the portion of debt installments sometimes exceeds the recommended limit. So that in the end, many people get into debt and are unable to pay it.
The inability to pay their debts resulted in many people being
“chased” by debt collectors. Therefore, those who are unable to pay
their debts will try to find a solution, one of the solutions is to do
refinancing.
But, Do You Know What is Refinancing?
Refinancing or what is
commonly referred to as credit refinancing occurs when a debtor, be it a
business or an individual, makes revisions to his loan. By refinancing it means
that you can pay off existing loans so you can apply for new loans.
Most people usually choose to refinance credit in exchange for a loan
with a better interest rate so that the monthly payment will decrease and then
save money with interest and other fees. Debtors usually also prefer to
refinance by resetting the loan agreement when interest rates have changed
substantially. Thus, it can create potential savings on debt payments from the
new agreement.
Over time many loan repayments with refinancing or refinancing options.
Examples such as mortgage loans, car loans to personal loans. This refinancing
is expected to improve your financial condition going forward.
How Refinancing Works
With refinancing, of course,
it will involve reviewing a person’s credit terms starting from the business to
his credit status. This loan is considered for credit refinancing, including
for mortgage loans, car loans to personal loans. Business investors can also
refinance mortgage loans on commercial properties.
As we discussed above a little bit, this refinancing occurs when a
person or business changes interest rates, the schedule for repayments and the
terms of the existing agreements.
When refinancing means replacing an existing loan with a new loan by paying off the old loan debt. New loans should have better requirements or features than before in order to increase their finances. However, the details of the refinancing process depend on the type of loan with the same process.
- Previously had a loan and then wanted to increase that loan in several ways
- Look for a lender and find one that offers better loan terms than previous loans
- Then make an application for the next loan
- If the loan is approved, the new loan will be used to pay off the old debt in full
- You can make new loan payments until the loan is paid off and go back to doing it
The most important thing and must be avoided from refinancing is to reduce the use of debt such as with a credit card because this credit card has a relatively high risk if there is a default, it could be that all the assets you have will be confiscated. However, if you use the credit card for productive needs, for example, to build a business where later payment of the debt will use the benefits of the business, then it’s okay to use a credit card.
Therefore, make sure to make loans for productive needs, not for
consumptive needs.
Types of Refinancing
In general, there are 3 types of refinancing that can be selected according to your needs.
- Cash in refinancing – Paying part of debt with cash so that the value of the debt is smaller.
- Cash out refinancing – Withdrawing additional cash when the collateral price increases for other purposes.
- Rate and term refinancing – This is the most common type of refinancing, which covers old debt with new debt with lower interest rates.
Benefits of Refinancing
Refinancing is not just digging the hole cover the hole, Pins. It turns
out that there are many benefits that Pins can get from this financing method.
1. Avoid the black notes
Banks
This is one of the reasons Pins use refinancing. If Pins are in a
certain situation and are unable to repay the loan, then the credit record for
Pins recorded by Bank Indonesia will decline or even fall into the black notes
of Bank Indonesia. If you have this, Pins will find it difficult to apply for a
mortgage or other loan.
2. Change the terms and
conditions of the loan
Refinancing is not just about not being able to pay off a loan, you
know, Pins! There are also those who choose to pay off old loans and create new
ones if they want to pay off the loan early. As we know, some loans, such as
mortgages, have a minimum tenor. If Pins want to pay off the loan earlier than
the agreed tenor, Pins will be subject to a fine. Now, with refinancing, Pins
can reset that – both speeding up and extending the tenor!
3. Get additional funds
In some situations, Pins can use refinancing to raise additional funds.
For example, after the KPR road for 10 years, Pins plans to carry out
renovations. Pins can apply for refinancing with a slightly larger amount to
pay off the remaining mortgage and get funds to carry out the renovation.
4. Change the type of
loan
Apart from modifying the terms and conditions of the loan, Pins can
also change the type of loan. For example, if Pins have a conventional mortgage
and feel the floating rate is too high, Pins can try to apply for refinancing
to convert them into installments with fixed rate interest. Of course this
depends on the terms and conditions of the bank and their refinancing program.
5. Reduce monthly
payments
In line with the benefits above, Pins can apply for refinancing with
specific strategic objectives. For example, Pins can get refinancing assistance
with a looser tenor with fixed interest, of course this will significantly
reduce your monthly payments!
Credit refinancing loss
In addition to the many benefits that can be obtained from credit
refinancing, there are also some disadvantages to be aware of.
1. Transaction fees
For those of you who don’t know, refinancing can be very expensive.
There is no exact price regarding the refinancing fee, depending on the
individual conditions. However, the fees that must be paid by the debtor
usually range from 3 percent to 6 percent of the total value of the new debt
proposed. These costs are for filing purposes, administration, inspection fees,
and debt closing costs. Debt with a large value such as a mortgage can cost
even more.
2. Higher interest
costs
The main purpose of credit refinancing is to get a smaller loan
interest so that the debt burden is also reduced. However, this is not always
the case with refinancing. You can get stuck paying a higher interest rate. For
example, when you extend the debt maturity period. Even though you have more
time to repay debt, it turns out that the amount of interest that must be paid
is even greater.
3. Missed out on
various advantages
Some types of debt usually offer certain benefits or benefits that will
be lost if you decide to refinance. For example, on a mortgage loan, as long as
the installment process is still ongoing, the credit provider will provide
insurance. However, if the mortgage is paid off because you submitted another
debt with a lower interest rate, the insurance will automatically disappear.
How do I refinance?
Actually, refinancing is
not much different from when you are looking for a new creditor to apply for
debt. If you want to do rate and term refinancing, then you have to make sure
that this new creditor is much more profitable than the old one, so that your
burden in paying off debts will be much lower.
At least, find three fund
providers who are willing to provide loans to you and what are the advantages
they offer if you want to borrow funds from them. Before you sign this new
agreement, make sure you have read all the terms and conditions.
That’s everything there is to understand about credit refinancing.
Think carefully whether refinancing is the right step before making a decision.
Also consider which type of refinancing is the most profitable and in accordance
with your current financial condition.
