Should I refinance my loan?

Adopting to refinance may sound an easy way out to many home loan borrowers when RBI announces a rate cut, and banks do not offer the new rates to its existing loan borrowers. But should you refinance your car loan, home loan and personal loan?

Let’s take a sneak peek to know the answers –

 Should You Pay-Off your loan?

Prepaying a personal loan or car loan or even a debt of credit card could benefit your financial portfolio; however prepaying a home loan is something you need to evaluate based on following factors –

• Prepaying your home loan, at which point of loan tenure  matters a lot.
• Are you availing tax benefits from your home loan principal and interest payments?
• How many funds do you have for your future?
• What are the other liabilities?

Answering these questions, will give you an indication of what is to be done.

How to reduce the cost of your personal loans?

A personal loan that is considered to be an unsecured loan should be closed as and when your financial portfolio permits. Here are quick tips on how to achieve it –

• Use Your savings to repay your personal loan
• Opting for refinancing with another bank, a cheaper interest rate could help you in the longer run to save money and also close it early. For example:

Anand took a personal loan of 2,00,000 INR for five years at interest rate 14 %

Current EMI = 4654 INR

Total Outstanding = 111,688 INR

Principal = 63,839 INR

Interest = 47,848 INR

Total Interest Due = 55,856 INR

After two years of payment, he thought of switching to a new bank that was offering an rate of  13.15%. The new calculation –

Processing fees by the new bank = 0.4 % = 447 INR

New Tenure = 36 months

New EMI = 3,771 INR

Total Interest Due = 24,068 INR

Total Amount to be paid by Anand to new bank = [447+24,068] = 24,515 INR

Total Savings = 31,341 INR [55,856 INR -24,515 INR]

Does it make sense to consolidate Loan?

If you have multiple sources of debt and are not able to pay the EMI’s to all sources due to money crunch or some other reason, you could opt for debt consolidation i.e. moving all your loans to one borrower; this would give you some breathing space and also help you in managing one single loan.

Debt consolidation will allow the borrower to avail of a fresh loan that will allow him to pay off all smaller loans and unpaid amounts on credit cards. It offers following benefits –

• Managing one single loan account is far easier than managing multiple accounts with different banks, memorizing each bank’s payment date and schedule.
• Debt consolidation could lower your interest rates, i.e. you could, in turn, get more inflow of your monthly income.

For example

Kaushik is currently availing three loans

Home loan –  40 lakhs for 20 years at an interest 10 %

On consolidating and shifting to say Bank “X”, Kaushik would now have one loan as below-

Total Savings = 21,875

Savings in Rate of Interest = -0.17 %

Does it make sense to refinance a car loan?

One should opt for  car loan refinancing only when –

• Interest rates have dropped
• When you planned your purchase, for some reason you had to opt for a higher rate
• If you are under a financial burden and want to save a few bucks monthly

Let’s quickly take an example to get clarity on whether it makes sense to refinance your car loan?

Loan Amount = 500000 INR

Loan Tenure = 60 months or 5 years

Interest Rate = 11.5 %

EMI = 10,996 INR

Total Interest Payable = 1,59,778 INR

After two years

Balance = 3,22,468 INR

Interest = 73,388 INR

On opting for refinancing with a bank offering a ROI 11 % for three years

New EMI = 10,557 INR

Processing fees = 0.8 % = 2,580 INR

Total Interest Due = 57,584 INR

Savings = 73,388 – [57584 + 2580] = 13,224 INR

So we saw the savings are not very vital, hence refinancing a car loan should be done smartly.

Does it make sense to refinance home loan?

If RBI has announced for interest rate cuts and your bank is not offering that rate to its existing borrowers, you could refinance your mortgage.  However, one should consider following factors before opting for refinancing –

• Interest rates: The interest rate would decide your EMI, so the lower the rate the best it is. Explore with few banks and check rates being offered.
• Banks Processing charges: Many banks advertise with “zero processing fees” as a tagline, but each bank will charge you with some amount of processing fees. So, make sure you compare the amount you save versus amount you pay, if the result is quite significant, refinancing is the best solution else hold your horses!

We hope we have helped you in getting a clear picture of whether you should refinance your loan.  If you still have any unanswered questions or need help, feel free to contact us here

We would be glad to help you with your planning and investment related decisions.

Samiksha Seth

Content Writer- Dilzer Consultants Pvt Ltd.

Sources

http://profit.ndtv.com/news/your-money/article-should-you-refinance-your-home-loan-321863

http://www.indiainfoline.com/article/news-top-story/interest-rates-falling-should-your-refinance-your-home-loan-115061400042_1.html

http://www.businessinsider.in/FourGood-Reasons-To-Refinance-Your-Home-Loan/articleshow/33775770.cms

http://archive.indianexpress.com/news/do-your-maths-before-going-for-refinance-of-home-loan/794407/

https://www.moneyadviceservice.org.uk/en/articles/how-to-reduce-the-cost-of-personal-loans

http://www.bankingmyway.com/credit-center/auto-loans/why-car-loan-refinancing-bad-idea

18 December, 2015