Refinancing

Refinancing involves replacing an existing loan with a new loan that pays off the debt of the original. The new loan should ideally have better terms or features that improve your finances to make the whole process worthwhile.

You can refinance a home loan, a vehicle loan, or just about any other debt. You might want to do so if your existing loan is too expensive or too risky. Maybe your financial circumstances have changed since you first borrowed the money, and more beneficial loan terms might be available to you now.

You can also adjust certain terms of a loan when you refinance, but two factors don't change: You won't eliminate your original loan balance (you could even increase it if needed), and your collateral must remain in place.

Pros and Cons of Refinancing

Refinancing has several potential benefits:

• It can lower your monthly payments.
• You can extend repayment by increasing the term of the loan.
• It might consolidate multiple other loans into a single.
• You might prefer to switch to a loan at a fixed rate for a period of time to remove the volatility of a variable rate loan.

The outcome is often a healthier monthly cash flow and more money available in your budget for other essential monthly expenses.

But refinancing isn't always a smart money move. Drawbacks include:

• It can be expensive to obtain the new loan.
• You'll pay more interest on your debt when you stretch out loan payments over an extended period. You might lower your monthly payments, but that benefit can be offset by the higher cost of borrowing over the life of the loan.
• Some loans might have useful features that will be eliminated if you refinance.