Is it Smart to Refinance a Loan?

Refinancing a loan is often a wise decision for consumers as it allows them to take advantage of low interest rates. However, just because you can refinance doesn't mean you should. To determine whether refinancing is a smart decision, you have to balance a number of positive and negative factors.

Financial Goals

Consumers should always consider what their goals are before they agree to refinance a loan, according to Don Taylor of Bankrate. Some people, for example, refinance as a way to consolidate other debts, while others do so in order to take advantage of lower interest rates. Regardless of your reasons, you should understand that refinancing a loan doesn't decrease the amount you owe; it merely changes the terms of repayment.

Terms

When you refinance your loan, be it a car loan, mortgage or other form of debt, you try to get better loan terms than those you currently have. For example, if you refinance a mortgage, you typically do so in order to get a lower interest rate on your new mortgage. With a lower interest rate you not only have to pay less each month but also will pay less over the life of the mortgage.

Time Frame

The timing of your refinancing is also an important factor to consider. If you recently refinanced a mortgage because interest rates dropped, doing so again soon is usually not a good idea. You should always consider closing costs and other fees associated with a refinance, as these can add considerably to the total expenses involved. If you refinance more than once or twice, any potential financial benefit you reap from the lower terms can be eliminated by the additional closing costs.

Other Factors

If you're considering refinancing a loan, such as a car loan, you also need to consider other financial factors. Just like any loan, lenders will investigate your credit worthiness to determine if you get the loan and what terms they offer you. If you have a bad credit score, for example, you probably won't get the lower rate your desire. On the other hand, if you wait until your credit score improves, you'll be better able to obtain the best loan terms possible.