Is refinancing a loan profitable?

Loan refinancing is a popular banking service, with which you can reduce the debt burden and make debt repayment more comfortable. In this article, you will learn about which loans can be refinanced and how to do it with maximum benefit.

How it works?

In fact, refinancing a loan is the repayment of existing debt on one or more loans by issuing a new loan. Unlike conventional “loan-for-loan” refinancing, refinancing is used to make debt repayment less burdensome for the borrower. So, with the help of refinancing, you can reduce the interest rate, increase the term of the contract, change the loan currency, or combine several existing loans into one.

The conclusion of a refinancing agreement implies that the bank will repay one or more loans available to the borrower, after which the borrower will repay the debt to the new creditor in accordance with the terms of the new agreement. As a rule, funds under a refinancing agreement are not issued to the client, but are transferred by bank transfer to repay current loans, however, there are programs under which part of the loan can be used for the personal needs of the borrower.

Today, many Russian banks offer debt refinancing services. This procedure becomes especially relevant during a period of active changes in the credit market, for example, when interest rates are lowered. Since the average interest rate for almost all types of loans has decreased by several points in recent years, it is not surprising that many borrowers are trying to renew contracts on more favorable terms for themselves. Of course, most often, since the overpayment on housing loans is the most significant, however, debts on other types of lending can also be refinanced.

When is it profitable to refinance a loan?

In order for the on-lending procedure to be economically justified, it is necessary to take into account a number of factors:

The term of the refinanced loan. Since most banks use to repay their loans, it is advisable to refinance in the first years of the contract, when the percentage of interest in the monthly payment is maximum. The exception is loans with a differentiated payment system, in which the principal is repaid in equal installments over the entire term of the loan.
The value of the interest rate. If the difference in rates under the old and new agreements does not exceed 2-3 points, it makes no sense to start refinancing. Often, applying for a new loan is associated with additional costs in the form of fees or commissions, which, coupled with interest already paid on an existing loan, negates the expected benefit from a reduced rate. This is especially true for secured loans, which require a paid revaluation of the collateral and amendments to the insurance contract.
situation in the foreign exchange market. Often loans in foreign currencies are issued at a more attractive interest rate, but due to exchange rate differences, the repayment of such loans can become very burdensome for borrowers. Since in recent years it has been constantly declining, reissuing a foreign currency loan into a ruble loan can be a profitable solution even with an increase in the interest rate.
Having multiple loans. If you have several loans at different interest rates at the same time, it makes sense to transfer the debt for all products into one new agreement. For example, you simultaneously repay the debt for , and . The rate on a consumer loan is 18% per annum, on a car loan - 15%, and on a credit card - 25%. At the same time, payments on each of the loans fall on different dates. Having resorted to the refinancing procedure, you can simultaneously close all three existing loans, replacing them with one at an average interest rate of 17% per annum. This will reduce costs by lowering interest rates on consumer loans and credit cards, and will make the repayment process more comfortable, since instead of three different payments, you will only need to make one.

In addition, some banks provide borrowers with the opportunity to replace the collateral during refinancing. So, when receiving a new loan to repay a previously issued mortgage, you can provide another property that meets the requirements of the bank as security. This may be necessary if it is required to remove the encumbrance from the mortgaged apartment in order to carry out another transaction with it.

What do you need to refinance a loan?

First of all, you need to choose a credit institution that will offer the most favorable refinancing terms. Many borrowers prefer to apply to those banks with which they have already concluded agreements, but not all lenders are ready to refinance their own loans. If your bank does not refinance debt, try to choose another lender, the terms of on-lending which will be the most attractive. When choosing a program, you should pay attention to the following parameters:

the size of the interest rate;
the presence of additional commissions;
the need to take out insurance;
security requirements;
the possibility of obtaining a loan in an amount exceeding the current debt.

After choosing the optimal refinancing program, you should conduct and compare the overpayment on existing and future loans. To do this, you can use the online debt calculator.

What documents are needed to refinance a loan?

As a rule, for refinancing, the same set of documents is required as for applying for a regular loan:

the passport;
employment history;
income statements;
collateral documents (if necessary).

Additionally, the bank will need information about existing loans: copies of contracts, certificates of the amount of debt. It is important to note that most banks do not refinance loans that are in arrears, so try to make all necessary payments before applying.

Pitfalls when refinancing a loan

Despite the obvious advantages, the on-lending procedure is associated with additional inconveniences. Most often, when applying for refinancing, borrowers face the following difficulties:

the need to collect a large number of documents (especially if there are several loans);
requirements for refinanced loans (often banks refuse to refinance loans for which less than six payments have passed, or loans for which they were previously issued);
when refinancing a mortgage, an increased interest rate may apply for the period of re-registration of the collateral;
additional costs for assessing collateral, reissuing insurance, etc.

To make refinancing really profitable, carefully study all the conditions of the refinancing programs offered by banks and calculate the difference in the overpayment on the old and new loans. Often the conclusion of a new loan agreement really helps to significantly alleviate the debt burden, however, in some cases, the expected benefits may not compensate for the efforts expended.