Refinancing Your Loan

Is it profitable to refinance?

Refinancing means getting a loan for the repayment of another loan (or some other type of credit).

In practice, it means a transfer of the loan from one bank to another. Such operation is advantageous when the current loan has high interest rate, and the bank does not agree to reduce your installments. In such case, you can use services of another bank, to lower your installment. It may be achieved not only by getting a loan with lower interest rate, but also - for example - by getting a loan for a longer repayment period than in the previous loan. But - the interest rate is not the only cost of the credit - so you must bear in mind the costs, which may be associated with refinancing.

First of all, there may be a cost you would pay to the current bank. The loan agreement may have a penalty clause ("call provision"), in which a commission for the lender is foreseen in case of early repayment of the loan. In some cases this may be even 1-3% of the remaining capital, so in case of a large credit amount, it can be a big expense, which can make refinancing not profitable for you (cumulative gain on the interest over the remaining repayment period can be lower than the fee for early repayment). Therefore, if we get a loan, it is important to make sure, that the lender does not charge any fees for early repayment. If we have the freedom to change the bank, it will be a strong argument in negotiations with the bank and maybe the lender will change the terms of the credit and you won't have to refinance at all.

In addition, with some kinds of loans, there may be additional costs. This applies mainly to mortgages. Every lender needs a collateral and in most countries securing a home loan is not free - there are some fees collected by the courts and there may be also some taxes to be paid (of course in different countries the procedure of securing the loan may vary).

Finally, you must take into account potential additional fees for the new lender. However, usually the new bank will not charge any fee to encourage us to refinance the loan.

Refinancing is usually profitable in times of prosperity and good growth in the economy. On the other hand, in times of crisis, banks usually are less willing to lend money and the situation on the credit market can get worse than it was while you were getting your current loan. In such case, you usually won't find any good offer of refinancing your loan.