Refinance explained

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Refinance explained

Businesses often chose to refinance a loan agreement when interest rates have substantially changed to help make savings on repayments under a new agreement. They revise the terms of the old credit arrangement, interest rate or payment schedule.

How does refinance work?

Refinancing is when your credit terms and credit status are reevaluated to seek a new credit agreement. In business, this is typically for mortgage loans on commercial property or payments on financed commercial vehicles.

For consumers, refinance is often undertaken on car loans, mortgages and motorhome purchases.

The reasons that people chose to refinance vary but, commonly, it involves a change in the rate environment, a change in financial plans or an improved credit profile. The goal would be to pay less in interest over the life span of the loan.

Types of refinance loan?

You can opt for several different types of refinance options, depending on your needs as a borrower. These are:

  • Cash-out refinance
  • Cash-in refinance
  • Rate and term refinance
  • Consolidation refinance

What refinance won’t change

While it is possible to change some aspects of the terms of a loan, refinance will not change everything. These two factors will not change when refinancing:

  • Collateral
    Any collateral you used to secure against the loan is likely to still be required under the new terms. For example, you could still lose your home if you refinance but fail to make payments.
  • Debt
    You will not get rid of or reduce your existing loan balance by refinancing. It is even possible to get into more debt by refinancing, for example, if you take cash-out refinancing, receiving the cash difference between the refinanced loan and what you already owe, or roll all your closing costs into the loan.

The pros of refinancing

Refinance loans will often lack the attractive features of new loans (used to entice your custom) but they still come with some big advantages:

  • Loan term changes
    You can extend or shorten the term of the loan depending on your financial needs.
  • Lower interest rates
    Refinancing into a loan with lower interest rates will lower the financing costs.
  • Change of loan type
  • Consolidate debt
    You can consolidate multiple loans into a single loan and apply a lower interest rate to your whole debt. This can also make it easier to track payments.

The cons of refinancing

Refinancing is not always the right move and can come with its own drawbacks including:

  • Higher interest rates
    Extending a loan over a longer period can see you pay more interest on your debt. You might enjoy lower monthly payments but might end up paying more over the lifetime of the loan. Do your research and make sure refinancing doesn’t backfire.
  • Losing benefits
    Are you willing to give up the benefits you received on your original loan? Consider this carefully.
  • Expensive transaction costs
    Refinancing can come with a lot of associated costs, including application, origination, appraisal and closing costs. The usual rates of between 3% and 6% could end up adding thousands of pounds to the overall costs of the loan.

Refinance could be a solid route for you but getting it wrong could also be financially problematic. It is worth discussing your needs with a broker or financial expert with experience in refinance to help you make the best decisions.

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