What is Refinancing: Meaning, Types, Benefits & Examples

In today’s time, effective finance management is no longer an optional thing. It has become a necessity if you want to ensure long-term financial stability. This includes determining your short-term and long-term financial goals, keeping track of expenses, and making strategic investments. Apart from this, streamlining your existing debts is also a crucial step in finance management. This can be done through loan refinancing.

Table of Content

• What is refinancing?
• How It Works
• Types of Refinance
• Benefits

Wondering what the meaning of 'refinance' is and how it can benefit you? Here is a detailed explanation of this concept:

What is refinancing?

A refinance can be defined as the process of replacing an existing credit agreement with a new one. This is usually done to take advantage of any changes in the rate of interest or improve the borrowing terms. Apart from this, people also opt for refinancing when their credit score improves with time, making them eligible for better loan terms. Or when one’s long-term financial plans change, and they want to consolidate their existing debts, loan refinancing comes to the rescue.

How It Works

Imagine you obtained a loan with a high rate of interest or a shorter tenure. But after a few months, you come across a loan scheme that is offering a lower interest rate with an extended repayment period. By opting for loan refinancing, you can replace your existing debt obligations with a new loan.

In simple words, refinancing allows you to revise your loan with terms that align better with your current financial situation and goals.

Types of Refinance

There are mainly four types of refinancing. You can pick any of these depending on your specific needs.

Rate-and-Term Refinancing

This is the most common type of loan refinance. In rate-and-term loan refinancing, the existing debt is paid and replaced with a new loan agreement. This new loan comes with a significantly lower rate of interest.

Cash-out Refinancing

This type of loan refinancing is used for secured loans. When the collateral that was pledged to obtain the loan initially increases in value, the borrower can opt for refinancing. This involves gaining access to that extra value while still maintaining ownership of the asset. In this option, the total loan amount is increased by giving the borrower immediate access to cash.

Cash-in Refinancing

Cash-in refinancing is the opposite of cash-out refinancing. In this option, the borrower can pay a small part of the existing loan and reduce the outstanding loan amount. This is an effective way to qualify for a lower rate of interest or better borrowing terms.

Consolidation Refinancing

In this type of refinancing, a single loan is obtained to pay off multiple small loans. This is usually done when a new loan is available with a higher loan amount and a lower rate of interest.

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Benefits

• Reduced Monthly Payments: One major advantage of loan refinancing is that it allows you to shift your loan from higher interest rates to lower rates. This has a direct impact on the total payable amount, reducing the EMI amount significantly.
• Shorter Loan Tenure: Sometimes, borrowers obtain loans with a longer tenure, but over time, their financial situations and goals change. So after a certain period of time, they want to reduce their repayment period. Loan refinance allows them to replace the existing loan with a new one with a shorter tenure.
• Debt Consolidation: Loan refinance allows individuals to consolidate their multiple small loans with high interest rates. They can obtain a single loan to pay them off and streamline their finances. Since the new loan is obtained at a lower rate of interest, it not only enhances convenience but also helps in saving money on interest.

Suggested Read: Gold Loan Repayment Strategies with Maximizing Benefits

When done right, loan refinancing can help you manage your debt effectively while saving a significant amount of money by reducing the total payable interest. The key is to pick the right loan scheme from a reputable lender while opting for refinancing.

 At Muthoot Finance, we offer several schemes for personal loans at highly competitive interest rates. You can explore all the options and choose the one as per your preference.

 Apart from this, we also offer several mutual fund schemes for individuals who want to make investments and yield high returns. For information, you can either reach out to us online or visit your nearest Muthoot Finance branch.