Have you considered refinancing your loan(s)?
Before we dive into what this refinance business is all about, let’s look at the state of the nation – when it comes to loans, that is.
A quick look at the Illion Mortgage Nation report of 02/2020 showed a whopping 6 million mortgages, worth a collective $2.1 trillion. There are in the region of 16 million active credit cards and, according to the Australian Bureau of Statistics, there were $1.25 billion new fixed-term personal loan commitments in April 2020. That’s a lot of loans – and a lot of interest.
Though loans are tricky business, there are options out there for borrowers to save money. One option is looking into refinancing options for personal loans. This simply means replacing your current loan with another loan product or renegotiating a better deal. The new loan can either be with the same lender or with a different one. The main purpose is to reduce your payments by getting a better personal loan interest rate or combining multiple loans into one simple repayment with a consolidation loan.
Sounds simple, right? Well, yes and no. We’re about to run you through some things you should know about refinancing.
Reasons to consider refinancing a personal loan
1. Getting a better rate
Refinancing personal loans can be a smart option if you’re interested in getting a better rate on your loan repayments. If you can get a lower interest rate, you could save a significant amount of money during the lifetime of your loan.
Many people choose to refinance because they can shop around for a new lender with a better rate once they have some loan repayment history. In some cases though, you may be able to get a better deal with your existing lender. Some lenders may offer new personal loans with better interest rates if, for example, your credit score improves, or you’re able to provide an asset that can be used as security on your loan. Ultimately, you would just need to chat with your lender about whether you qualify for a lower interest rate.
Hot tip: Understand interest
When comparing market interest rates, be sure to distinguish between the different types that are advertised. For example, a fixed interest rate is one that has been fixed and will not change over the life of the loan. A variable interest rate is subject to change and will be affected by the current loan market.
Similarly, a base (or advertised) interest rate is the percentage of the loan that is charged each repayment instalment. A comparison interest rate, on the other hand, is designed to allow you to compare the true cost of the loan. Comparison interest rates will include the base interest rate as well as additional fees and charges. These are generally ongoing charges, such as servicing fees or insurance fees.
By identifying the correct type of interest rate and comparing it against the interest rate attached to your loan, you will be able to see how much money you could save. Oiyo recommends using a personal loan calculator to help with your calculations.
It’s important to remember that the advertised rate may not be the rate that you get on your loan. Make sure you check your loan contract for the rates on offer to you by your lender, as these can vary from examples or advertised rates.
2. Taking advantage of better loan features
Another reason you may consider refinancing is to take advantage of other loan features. For example, if you’re struggling to pay off a debt, you may benefit from a new loan that allows for reduced repayment amounts or longer repayment terms. This gives you a bit more flexibility in terms of repayments and may ease some financial stress you are experiencing repaying back your existing loans.
Alternatively, you may merely be in a better financial position than you were when you took out your previous loan(s). You may wish to pay back your debt faster over a shorter term. Refinancing, for this reason, is as valid as any.
As always, it is wise to do your research and compare the rates and terms. One may look better on paper, but it pays to double-check how the loan term will affect your actual repayments. Again, we suggest using a personal loan repayment calculator to compare your loan options.
3. Consolidating multiple debts
Keeping track of all incoming and outgoing expenses can be difficult at the best of times. If you have multiple debts and find you are making many – and oftentimes irregular – repayments on those debts, then you may want to consider merging the repayments. This can tidy up your outgoing expenses, allowing you to instead only make one repayment that will cover all your existing loan repayments. This way, it is much easier to keep track of your finances and makes budgeting a simpler task.
To check whether consolidating personal loans is a good option, calculate the total amount you are paying each month in all your existing loan repayments. Then, compare this to the figure that a new personal loan replacing these repayments purports to make you pay.
Be sure to include all extra fees on top of the monthly amount of repayments in your calculations. Occasionally, extra rates associated with refinancing may mean you are paying slightly more than you were before. However, you will need to assess your situation to work out if the convenience of one repayment is worth paying more. It all boils down to your individual circumstances.
Factors to consider before refinancing a personal loan
Though refinancing may look ideal, it is always wise to do some research and market comparisons. Be wary of any personal loan refinancing options and offers that look ‘too good to be true’ – actually, this applies to so much more than just loans, right?
Interest rates
A common catch, particularly when offered a better interest rate, is that the interest rate is lower but the repayment term is much longer, meaning you may be paying more in interest in the long run. Moreover, be careful that you are considering the comparative interest rate as opposed to the base interest rate. A simple mixup of information could cost you money.
Additional fees and charges
Some refinancing options may have hidden penalties for switching from your existing loan to a new loan. Your existing lender may charge you exit or discharge fees. Similarly, your new lender may charge an establishment or application fees. If you are consolidating many debts, there may be additional fees chargeable for this as well. These fees may be outweighed by the benefits of refinancing, but it is best to be aware of them so that you are not caught off guard. Here are some fees to look out for:
| Establishment/application fee | Many lenders will charge you a fee to establish your account with them, or kickstart your application. This is a very typical one-off cost to cover the cost of processing your loan documents. |
|---|---|
| Exit/discharge fee | If you choose to exit the loan agreement to refinance, then many lenders will charge an exit fee. This covers the cost of settling the balance and closing your account with that lender. |
| Break fee | If you exit your loan during the fixed interest rate period, you may be required to pay a break fee. |
Speak to both your new and old lenders and make them aware of the situation. There may be some scope to waive fees when refinancing.
How to refinance your personal loan
If you’re currently considering refinancing a personal loan or any other debt that you may have, you can follow this process. Personal loan refinance can be made easy by following a few simple steps:
Step 1: Scope out your personal finances
As mentioned above, one of the many reasons that lenders may provide the option to refinance your personal loan is because your credit rating has improved. You can check your credit score by using one of these three credit reporting bodies; Equifax, Experian or Illion. As these bodies are approved by the Australian government, they are required to provide a copy of your credit report to you for free, once every 12 months. Ensure that the information on this report is correct, as incorrect information may lower your score.
If you’d like to find out more about credit scores and how they work, try a tool like Tippla.
Step 2: Compare personal loan options
Ensure that you have all the information on your existing loan. For example, what is the balance remaining? What is the interest rate? What fees are you paying? Are you able to afford your current repayments? Having this information on hand will assist you in comparing your existing loans to refinancing options.
Consider shopping around by doing your research, but try not to apply for multiple different loans with multiple lenders at the same time, just to get the quickest ‘yes’. Loan applications are recorded on your credit report, and multiple applications can negatively impact your credit score.
Researching loan refinancing options with different lenders will allow you to see what they are offering. Lenders may allow you to check their refinancing options against your current loan before you apply with them. Keep in mind that the features of the loan that you are specifically searching for, such as a lower interest rate or longer repayment terms. This will help you eliminate lenders that don’t meet your preferred criteria and narrow down a list of potential lenders and loan options.
Step 3: Calculate the costs of refinancing
It is a good idea to do your own calculations to find out if you are going to save money by refinancing. You can use a personal loan calculator to do this, which will allow you to input all the rates and various other fees and terms to ensure you’re getting an accurate result.
Step 4: Apply for a new loan or negotiate with your current lender
Time to refinance a loan? Generally, you’ll need a few basic documents and photo identification such as a driver’s licence. Your lender may also ask for a credit history report, or they will conduct a search themselves.
Alternatively, you may have decided that you wish to negotiate a better deal on your current loan with your current lender. Ask your current lender if they would be able to match the offers that you have found elsewhere.
If you have a good relationship with your lender, this could save you the hassle of applying for a new loan – although these days, applying for a loan is a pretty painless experience. This won’t always work as some lenders may be unwilling to renegotiate – hear them out, it might be because of your credit score, circumstances or loan repayment history. If you are successful in negotiating, however, you may need to fill out some new forms.
Step 5: Ensure that your previous loan is cleared
Double (and triple) check that your previous loan is cleared and that the balance is at zero. Your lender must close your previous account to ensure that you are not accruing any additional fees or repayments from the existing loan. Once you ensure that this is complete, then continue repaying your new loan.
A note about Oiyo
At Oiyo, we’re trying to change the way we talk about money. We’re not financial advisors, but we can offer helpful insights and information on finance to help you navigate your finances.
We write helpful guides covering everything from personal finance to loans to insurance. Our aim is to make it easy for Australians to have access to simple, to-the-point financial guides. So, whatever financial query it is that you have, Oiyo is here to help!