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Refinancing Of Loan For Financial Strength

As the competition is at an all-time high with the growing presence of private banks and NBFCs, many refinance options are waiting for intelligent and knowledgeable borrowers.

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Life is all about pursuing developmental needs and meeting them through legitimate means. Most of the requirements can be anticipated, but some arise suddenly. People often succeed in addressing only those needs which were expected to occur within a specific time, but those capable of handling even the unforeseen needs always secure their place among the contended ones

Purpose and scope of refinancing
Loans are the most common tools to meet the financial needs of individuals and businesses, and they are equally effective in repaying the previous loans in case of urgency, and it’s known as refinancing of the loan. The very purpose of this financial instrument is the reorganization of debt to strengthen an individual or company’s overall financial health. The entire process starts with a new contract where the borrower negotiates with the lender and tries his best to avail the loan on more lenient terms such as lower monthly payment, longer-term length, and a more convenient payment structure, i.e., loan at a cheaper rate. However, for products like mortgages and car loans, refinancing loans tend to come with slightly higher interest rates than purchase loans.

Need of various sections of business and society
As refinancing allows a borrower to subvert their existing debt obligations through a new loan at a favorable rate of interest, the availability of money opens new vistas of growth for the borrower. Also, refinancing helps small businesses with a continuous inflow of working capital and zero downtime. Currently, most financial institutions, including scheduled banks and NBFCs, offer refinancing options to individual customers and registered companies. Apart from them, refinancing of loans is helpful to students in meeting their financial obligations, including repayment of education loans. Furthermore, individuals who want to repay car loans, loans against credit cards, and mortgages can also lift them from monetary problems through refinancing.    

Rewards of refinancing
Compared to restructuring, which involves altering an existing loan contract, refinancing is usually considered more beneficial to a borrower because it is easier to qualify for, takes less time, and positively impacts one’s credit score since the lender can access the payment. That’s why an existing borrower with high credit scores has better chances of a more favorable deal with the lender than one with low credit scores.

The most common advantage of refinancing is the reduction of interest rate on loans, comfortable loan structure, consolidating debts, and availability of substantial cash are the other principal benefits that a borrower receives. Besides, if the Reserve Bank of India (RBI) cut the interest rate, then the new loan structure formed after refinancing will result in a lower yield on interest payments because the old loan gets replaced by the new loan, which is a direct benefit to the borrower.

Refinancing pays off
When a student refinances a loan, s/he intends to consolidate multiple loans into one payment. But the lender should be the same so that the student (borrower) can manage debt through one lending institution. This way, a student can avoid paying high interest on education and other loans. On the other hand, working professionals and entrepreneurs take personal loans to refinance credit card debt. Replacing the high-interest rate on the credit card with a comparatively cheaper personal loan, credit holders efficiently manage debt and pay off the credit card balances.

Homeowners, auto loanees, and small entrepreneurs also strengthen their finance cycle using refinancing facilities. In the case of a mortgage refinance, homeowners can lower their EMI and reduce the mortgage time to half of the original. Also, through a shorter term, a homeowner can save a substantial amount of money on interest rates. Also, if a loanee has some surplus cash, the lender can recast the home loan and adjust the monthly payments. The receiver of auto loans also enjoys similar benefits. However, financial institutions which provide auto or car loans have some strict eligibility criteria for refinancing, such as the age of the vehicle, mileage, and outstanding balance. But refinancing is the most sought-after financial tool for small business owners to improve their working capacity and annual profits. By refinancing business loans, they also utilize the money to improve its infrastructure, technical capability, and supply of raw material. 

Refinancing with care
Whether you are a businessman, student, or a working professional, at some point in time or other, a situation arises to refinance a loan. But, without realizing the actual need and understanding of the language of the current agreement, it will be difficult to say how much debt one is paying. Before applying for refinancing, knowledge about the prepayment penalty on the existing loan is of utmost importance. After knowing the actual value of the current loan, one should do a comparative assessment of the reputed lenders in the market and must approach those who seem to meet the financial goals. Today, as the competition is at an all-time high with the growing presence of private banks and NBFCs, many refinance options are waiting for intelligent and knowledgeable borrowers.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Mahesh Shukla

Founder & CEO, PayMe India

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