3 Scenarios Where It Makes Sense to Refinance

Chances are that you’ve seen the commercials telling you to “refinance now and save thousands of dollars!” 

Refinancing is when you pay off an existing loan with a new loan, typically with better terms than the original, resulting in interest savings. 

If you currently have a personal loan or credit card debt, taking advantage of today’s low interest rates could save you thousands in the long-term.  You’d be surprised at how simple the process has become. 

Before deciding whether to refinance, you should consider your options. Below are three situations where refinancing would make economic sense.

1.  Your Credit Score and/or Salary Has Gone Up:

If your financial situation has improved at all, chances are you can graduate to a loan or credit card with better terms.  Why continue to pay a 24% APR on a credit card if you can qualify for a short-term loan at 15% or less? 

This is a very common predicament among millennials and recent graduates.  Due to their limited credit history and lower earning potential, they tend to get locked into higher interest rates on credit cards and personal loans.  

Taking out a new loan to pay off credit cards can benefit you in two ways:

  • First, you will save hundreds, possibly thousands, in interest if you can secure a lower fixed rate.  Most credit cards have variable APRs, meaning that as interest rates rise so does your APR.  Lock in today’s low rates – they can only go up from here.
  • Second, most people with credit cards pay the minimum monthly payment or close to it.  This is a recipe for life-long debt servitude.  Swapping a credit card with a short-term loan will force you to pay it off quicker, saving you years of payments and thousands of dollars. 

2.  You’ve Already Paid Down a Large Portion of What You’re Financing:

This option only applies if your loan was used to finance a large purchase, such as your home, car, or a piece of equipment.   These loans are called asset-backed loans, because they use the valuable that you are buying as collateral. 

A key metric that lenders look at when deciding on your interest rate is called loan-to-value, or LTV.  Put simply, this is the percentage of the total cost that they will lend to you. 

For example, if you want to buy a car worth $10,000 and the lender offers you $7,500, your loan-to-value is 75%.  As you pay down the loan principal, the LTV is reduced. 

Using the same car example as above, let’s say you now have $3,500 remaining on your loan and your car is now worth $7,000.  That means that your LTV went from 75% to 50%. 

A lower LTV generally results in a lower interest rate, so refinancing your remaining balance could result in major savings.  Keep in mind that some refinancing options will extend the length of the loan, so be careful as the extended duration may cut into some of your savings. 

3.  You Simply Want to Take Advantage of Lower Interest Rates:

This option is popular for people with mortgages.  Not only can you lower your APR, but you can also opt for a more favorable mortgage product (Adjustable Rate Mortgage to Fixed, 15 year to 30 year, etc.)

Keep in mind that some lenders may hit you with fees when you refinance, so make sure that you either find a company that doesn’t charge, or that your potential savings from refinancing are greater than the fees you pay. 

Monitoring your debt and keeping an eye out for better offers is extremely important.  If you are paying too much on a credit card or need to find a loan, visit our personal loan and credit card search to find reputable lenders that offer great alternatives to high-cost loans. 

Federico Douzoglou, CEO

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