All about: refinancing a loan

Refinancing loans has become an increasingly popular option for different cadres of debtors in recent times as the world reels from the effects of the global economic crisis of 2008. This article briefly describes what this is and why people do it.

Transforming an existing debt

Refinancing a loan is the process of transforming an existing debt so that it becomes a new obligation that has different terms. This usually takes place when a borrower wants to clear a loan earlier than scheduled or later than previously anticipated. Over the last three years, loans refinance has become more prevalent as the effects of the global economic crisis wear off. This has been common in the mortgage market where the subprime market forced many owners into refinancing home loans. The main reasons that spur debtors into refinancing loans include the need to reduce instalment payments, to increase instalment payments, to combine several loans, to extract previously dedicated cash, to exploit improved interest rates and to change risk aspects to your favour. Increasing or reducing instalment payments often targets completion of the loan earlier or later than the scheduled date. Combining several loans is also advantageous since the loan with the lowest rate can become the base for other loans. A good example is evident in the popular option of combining credit card debt with home loans to apply mortgages refinancing. This helps to shift credit card interest rates into the more affordable mortgage rates that have longer repayment periods.

Difficult to repay

At the same time, mortgages that prove difficult to repay usually undergo refinancing through a process called remortgaging. This is the process of settling a mortgage with funds from a new one, using the same property as collateral. Remortgage deals have become a prime source of relief for homeowners who suffered under the effects of the sub-prime mortgage crisis of 2008. Refinancing loans also helps debtors to exploit improved interest rates and risk differentials. Some loans have variable interest rates that are initially punitive. However, this may improve later and spur debtors to refinance, giving them room to adjust and pay less on the loan. At the same time, refinancing to avoid risk also involves an alteration of terms that allow instalment restructuring.