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Refinancing: Everything You Need To Know

30 Mar 2023

What is refinancing?

Refinancing is the process of replacing an existing loan with a new one that has different terms, such as a lower interest rate or a shorter repayment period. Refinancing can allow borrowers to change their loan structure, consolidate debts, refinance a balloon repayment or to finance over a longer term. Refinancing is often used to reduce borrowing costs and / or to obtain a better loan structure. In most cases, refinancing is done to obtain a lower interest rate, which reduces monthly payments and overall borrowing costs. Refinancing can be a smart financial move for many borrowers, but it is important to understand the process and the potential benefits and drawbacks before deciding to refinance.

Why refinance?

Perhaps your needs have changed, or perhaps you are looking at getting the best deal possible. There are several reasons why you might consider refinancing a loan. Some of the most common reasons include:

  • Lower interest rates: You’ve found a loan with a lower interest rate, allowing you to take advantage of lower rates and potentially save money over the life of the loan.
  • Shorter repayment periods: Refinancing can also allow you to shorten the repayment period of your loan, which can help you pay off the debt faster and save money on interest.
  • Switch to a fixed rate: If you have a variable rate loan, refinancing can allow you to switch to a fixed rate loan, which can provide more stability and predictability in your monthly payments.
  • Consolidate debt: Refinancing can also be a way to consolidate multiple loans into a single loan, which can simplify your finances and potentially lower your overall interest rate. Either way there are several factors that need to be considered when thinking about refinancing. Refinancing is not suitable for everyone, which is why it is important to first speak with a professional, such as a finance broker, to discuss your wants, needs and current financial position before beginning any refinance application.

Potential Drawbacks of Refinancing

While refinancing can be a smart financial move for many borrowers, there are also potential drawbacks to consider. Some of these drawbacks include:

  • Closing costs and fees: Refinancing typically involves closing costs and fees, which can add up to thousands of dollars. It is important to factor these costs into your decision to refinance.
  • Longer repayment periods: If you choose to refinance to a longer repayment period, you may end up paying more in interest over the life of the loan, even if you have a lower interest rate.
  • Impact on credit score: Refinancing can also have an impact on your credit score, as it involves applying for a new loan and potentially opening a new line of credit.
  • Recoup your costs: Consider how long it will take to recoup the costs of refinancing through lower payments, as refinancing may not be worthwhile if the loan is paid off before the savings are realized.

Understand your options, and shop around for the best deals possible. You can do this yourself, however seeking assistance from a professional, such a finance broker, takes all the heavy lifting off your shoulders. Plus, brokers have access to a broad range of lenders.

Refinancing Process

If you decide that refinancing is the right choice for you, the first step is to shop around and compare rates from multiple lenders. You can also work with a financial advisor or broker to help you find the best refinancing options for your specific needs. Once you have selected a lender and loan, you will need to go through the application process, which typically involves providing documentation such as income verification and credit reports.

How to Shop Around

When shopping around for loan interest rates, there are a few things to keep in mind. These include:

  • Compare rates from multiple lenders: Start by researching and comparing rates from multiple lenders, including banks, credit unions, and online lenders.
  • Consider the APR: The Annual Percentage Rate (APR) is a more accurate representation of the overall cost of the loan, as it includes both the interest rate and any fees or charges associated with the loan.
  • Check your credit score: Your credit score will play a significant role in the interest rate you're offered, so it's essential to know your score before applying for a loan.
  • Ask about prequalification: Some lenders offer prequalification, which can give you an idea of the interest rate you're likely to be offered without affecting your credit score.

Refinancing can be a smart financial move for many borrowers, but it is important to carefully consider the potential benefits and drawbacks before making a decision. By doing your research and working with a trusted financial professional, you can make an informed decision about whether refinancing is right for you.

Our team of experienced brokers are here to help you refinance. We offer refinancing solutions for:

  • Home Loans
  • Motor Loans
  • Leisure Loans
  • Equipment Loans
  • Balloon / residual Loans

With access to over 35 lenders, we do the hard work for you. The team at Finance King can get your preferred term and rate. Speak with us today on 1300 086 329.