Large loan refinancing may not be worth it in all situations

Large loan refinancing is when you consolidate all of your smaller individual loans into one large loan, usually with a longer term and a lower interest rate

A refinance, or “refi” for short, refers to the process of revising and replacing the terms of an existing credit agreement, usually as it relates to a loan or mortgage. When a business or an individual decides to refinance a credit obligation, they effectively seek to make favorable changes to their interest rate, payment schedule, and/or other terms outlined in their contract. If approved, the borrower gets a new contract that takes the place of the original agreement.

Borrowers often choose to refinance when the interest-rate environment changes substantially, causing potential savings on debt payments from a new agreement.

For large loan refinancing to be worthwhile, the monthly payment on your consolidation loan should be less than the sum of the monthly payments on your individual loans. If you have a lot of debt, you’re not alone. Today, more and more people in Singapore are burdened with credit card and loan payments.

So whether you are trying to improve your money management, having difficulty making ends meet, want to lower your monthly loan payments, or just can’t seem to keep up with all of your credit card bills, you may be looking for a way to make debt repayment easier. Debt consolidation with large loan may be the answer.

What is large loan refinancing?

Debt consolidation is when you roll all of your smaller individual loans into one large loan, usually with a longer term and a lower interest rate. This allows you to write one check for a loan payment instead of many, while lowering your total monthly payments.
How do you consolidate your debts?

There are many ways to do debt refinancing. One way is to transfer them to a credit card with a lower interest rate. Most credit card companies allow you to transfer balances by providing them with information, such as the issuing bank, account number, and approximate balance. Or, your credit card company may send you convenience cheques that you can use to pay off your old balances. Keep in mind, however, that there is usually a fee for this type of transaction, and the lower rate may last only for a certain period of time (for example, six months).

Another option to do debt refinancing is to obtain a large loan using your home as equity.

Most banks and mortgage companies offer home equity loans. You will need to fill out an application and demonstrate to the lender that you will be able to make regular monthly payments. Your home will then be appraised to determine the amount of your equity. Typically, you can borrow an amount equal to 80 per cent of the value of the equity in your home. Interest rates and terms for home equity loans vary, so you should shop around and compare lenders.

Some lenders offer loans specifically designed for debt consolidation. Again, you will need to fill out an application and demonstrate to the lender that you will be able to make regular monthly payments. Keep in mind, however, that these loans usually come with higher interest rates than home equity loans and, depending on the amount you borrow, may require collateral on the loan.

Advantages of take large loan for debt refinancing

• The monthly payment on a consolidation loan is usually substantially lower than the combined payments of smaller loans
• Consolidation loans usually offer lower interest rates
• Consolidation makes bill paying easier since you have only one monthly payment, instead of many

Disadvantages of taking large loan for debt refinancing

• If you use a home equity loan to consolidate your debts, the loan is secured by a lien on your home. As a result, the lender can foreclose on your home if you default on the loan.
• If the term of your consolidation loan is longer than the terms of your smaller existing loans, you may end up paying more total interest even if the rate is lower. So you won’t actually be saving any money over time, even though your monthly payments will be less.
• If you use a longer-term loan to consolidate your debts, it will take you longer to pay off your debt.

Should you refinance your debts?

For debt refinancing to be worthwhile, the monthly payment on your consolidation loan should be less than the sum of the monthly payments on your individual loans. If this is not the case, consolidation may not be your best option. Moreover, the interest rate on your consolidation loan should be lower than the average of the interest rates on your individual loans. This allows you not only to save money but also to lower your monthly payment.

KEY TAKEAWAYS OF TAKING LARGE LOAN REFINANCING

• A refinance occurs when the terms of an existing loan, such as interest rates, payment schedules, or other terms, are revised.
• Borrowers tend to refinance when interest rates fall.
• Refinancing involves the re-evaluation of a person or business’s credit and repayment status.
• Consumer loans often considered for refinancing include mortgage loans, car loans, and student loans.