Is It A Good Idea To Refinance Your Loans During A Crisis?

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A massive social and economic crisis like the coronavirus pandemic has a once-in-a-generation impact. All aspects of life and work, from lifestyles and workplaces to finances and debt have been significantly disrupted. When it comes to finances, the disruption poses a massive challenge to households, but there are some things you could do to better prepare and manage the challenges. 


Refinancing might sound like an unusual thing to consider during a crisis, but in reality, if you do it right, it could help you save big and make extra cash available for emergencies. So why should you consider refinancing now and how could it lead to savings?


With official cash rates at a 60-years-low of 0.25%, you could find highly competitive refinancing deals with low rates. Although lenders might be more stringent about employment checks to avoid default, they’re also competing to attract new customers given the downturn and lower demand for products. 


When refinancing, you could try to negotiate a lower rate with your current lender and approach different lenders about their offers as well. However, bear in mind lenders is more likely to provide steeper discounts to new customers rather than customers who are already on their books. 


The benefits of refinancing

Refinancing now could provide you with access to more useful loan features. These features can offer much-needed flexibility in a financially challenging time. For example, for a mortgage, you might be able to opt into an offset account, redraw facilities, and additional repayments to minimize interest and have extra cash on hand for the future. 


Some lenders offer temporary specials like cashback for refinancing. Refinancing your mortgage could give you other options like consolidating personal and credit card debt. You could refinance into a loan that allows you to pay interest only for an initial period or lock in a fixed interest period, and these features could see you saving big as well. Note fixing your interest could also mean narrower repayment options. Additionally, you could be charged a large fee for breaking the fixed-interest loan.

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If you’re in stable employment, refinancing could give you the opportunity to make extra repayments if your current loan doesn’t accept extra repayments. As you refinance in a low-interest period, the combination of interest savings and extra repayments could significantly reduce your loan period. 


Additionally, refinancing could be a way to leverage built-up equity so you can free up funds for anything from renovating your house to living expenses. However, note that increasing your loan size not only exposes you to additional risk; it could attract costs like lenders mortgage insurance and government charges like stamp duty. Also, as Darren Robertson of Northern Virginia Home Pro points out, in the current market, your property could be valued lower than you might expect, which would affect your borrowing power and how much equity you have to tap into. 


Refinancing car loans

As with a mortgage, refinancing a car loan could make it possible for you to save on ongoing loan servicing costs as well. The longer it’s been since you first obtained your original car loan, the more likely you’ll find current deals to be competitive. If your credit score has improved since you first borrowed to buy your car, lenders might be able to offer you even more competitive offers. 


Additionally, the proliferation of alternative lenders like online-only lenders and non-bank lenders is another reason refinancing could let you save big. These lenders could have lower interest rate deals not available from traditional lenders, and you might be able to find a great deal by using a car loan comparison tool that lets you see rates and fees at a glance. 

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Typically car loans range from under 5% to 10%, and this large variation gives determined borrowers good potential for savings of as much as $1,000 or more over the course of a three to a five-year car loan. As with a mortgage, refinancing your car loan could also help make your monthly repayments more manageable. Lower interest rates could mean smaller monthly repayments. 


Whether you’re refinancing a car loan or some other type of loan, always make sure you’re able to meet the loan obligations. Verify your car hasn’t depreciated so much in value you can’t refinance it. For an accurate idea of the loan’s true cost, check for exit fees, ongoing fees, and any extra charges and costs. Do the maths to confirm you’ll be better off with refinancing. 


Final thoughts


Refinancing your car, home, and other loans during a crisis could allow you to save on interest or minimize your repayment times. However, you’ll need to be in stable employment or a secure financial position in order to be approved for a refinance. 


As with any major financial decision, do your own research, and obtain financial advice from professionals where possible. When assessing loans, consider introductory rates and fees and how quickly they revert back to standard levels after you sign up. Factor in all the fees and take time to understand the fine print so you’re not unpleasantly surprised by hidden costs.