Imagine this scenario: Your home has developed extensive cracks due to the torrential rains and needs immediate repairs. The repair costs are estimated to be around 50k to 75k. Your cash flows are constrained, and you don’t have any emergency funds to use. Also, you don’t want to prematurely close an investment. So, you take an instant personal loan from a bank/NBFC to pay for the repairs.
Since you were in dire need of immediate funds, you fail to do your research and take a personal loan at a high-interest rate. While the loan helped meet your emergency cash needs, you now feel that the loan EMIs are high. Is there any way you can reduce the interest burden and reduce the EMIs?
This is where refinancing a personal loan comes into the picture.
What is refinancing a personal loan?
Refinancing or personal loan balance transfer is the process of transferring your total outstanding loan balance from one lender to another. It’s usually done when the borrower can lower the interest rate on the outstanding loan by transferring it to another lender, who offers better interest rates.
The primary objective of refinancing a personal loan is to decrease the overall loan burden. Since the interest rate charged by the new lender is lower than that offered by the previous lender, it significantly reduces the loan burden. The customer can opt to maintain the current EMI, thereby reducing the overall loan tenure. Alternatively, the customer can lower the EMI while maintaining (or extending) the loan tenure while transferring a personal loan from one lender to another.
Top 5 Benefits of Refinancing a Personal Loan
- Reduced Interest Rates
The biggest advantage of personal loan refinancing is that it reduces the interest rate of the loan. When the interest rate reduces, it reduces the overall loan burden, which, in turn, decreases the EMI. As a result, the borrower will have to pay a lower EMI than the current EMI after transferring it to the new lender.
- Change in Loan Tenure
When a borrower transfers an ongoing loan to another lender, the loan contract is drawn from scratch. As a result, you can negotiate with the new lender to extend/decrease the loan tenure, as per your requirements.
Here are a few points to keep in mind while negotiating the repayment period:
- If the loan tenure is increased, then the EMI decreases. However, it extends the loan burden.
- On the other hand, if you decide to shorten the loan tenure, then the EMI increases. But, you can be freed from your loan burden in a shorter time.
- Reduced EMIs
When you refinance a personal loan, a portion of the borrowed sum is already paid to your current lender. So, the loan amount refinanced/transferred to the new lender is lower than the initially borrowed sum. You can opt to maintain your current EMI or lower it as per your convenience. However, remember that opting to lower the EMI increases the loan tenure.
- Loan Top-up Facility
Most lenders offer a top-up loan when a borrower transfers an ongoing personal loan. For example, let’s state that you have an ongoing personal loan with an outstanding loan balance of Rs. 3 lakhs. When you refinance a personal loan to a new lender, you can top up the ongoing loan with an additional amount, say Rs. 2 lakhs, to meet your funding needs.
However, note that increasing the loan amount increases your overall loan burden. So, ensure that you opt for the top-up loan facility, only if needed, not just because it’s offered.
- Improved Features
This is one benefit of loan refinancing that’s not often discussed. Besides getting a lower interest rate on your ongoing loan, refinancing a personal loan may also fetch you better service and improved features. For instance, the new lender may offer to waive off processing fees or charge no foreclosure penalties.
However, remember that these benefits are offered depending on your credit score and credit history. Having a high credit score helps you avail reduced loan interest rates and other attractive loan offers like zero processing fees, etc. So, it’s highly recommended that you check your credit scores before transferring your personal loan. CreditMantri makes it easy to find your latest credit scores for free within just a few minutes.
Few Points to Keep in Mind while Refinancing a Personal Loan
- Ensure all the personal loan refinancing options available and choose the best one that meets your requirements. CreditMantri makes it easy to compare different personal loan offers. The loan aggregator lists all the best personal loan refinancing offers for you, matched to your credit profile. Thus, the time you spend on comparing loan offers is reduced significantly.
- Personal loan refinancing doesn’t require collateral. However, you’ll have to pay a few nominal charges like foreclosure charges, stamp duty, and processing fees to the new lender. So, make sure to evaluate all these charges and decide if it’s worth refinancing the loan. Ideally, the savings you incur due to the refinance should be more than the cost of refinancing.
- Check the prepaymentpenalties with your current lender and the processing fees with your new lender to decide if the transfer is worth it. Do a cost-benefit analysis to determine whether the switch works in your favour.
The Bottom Line
Refinancing a personal loan can help in reducing your loan burden significantly. Remember that even a small reduction in the loan interest rate can lower your EMIs and overall loan burden. So, if you come across a lucrative personal loan refinancing offer, make sure to go for it, especially if you’re on a high-cost personal loan.
However, before you decide, ensure that you do a cost-benefit analysis to determine if the refinancing works for you from a savings perspective. As always, read the new lender’s terms and conditions so that there are no surprises later on.