Anyone who holds a loan may want to refinance it for the associated benefits that come along with the offer. However, your credit scores may take a slight hit when you refinance. But if the benefits of refinancing outweigh the downfall, you should definitely still consider it. Ultimately, the decision depends on your unique financial situation.
Refinancing is the process of paying off your existing loan with a new loan. A variety of loans have refinancing options, such as mortgages, auto loans, student loans, and personal loans.
It may seem redundant to refinance a loan, why bother taking out a new loan for an old loan? There are actually several advantages to refinancing as loans can become less beneficial to you over time, especially as better options become available to you.
Below are several reasons why people are motivated to refinance their loans:
Through refinancing, it is possible to get a lower interest rate than your current loan, especially if your credit and finances have improved since the last time you applied. Lower interest is a huge benefit because you won’t have to pay as much each period, which can lead to high savings.
Moreover, if you have an adjustable interest rate, you may be able to get a fixed interest rate when you refinancing. This may be appealing to those who have a strict budget and want to have steady payments.
Some refinancing offers can reduce fees related to your loan which can save you money in the long run.
When you refinance, you may be able to shorten or extend your loan term depending on what you’re looking for.
For debt consolidation purposes, refinancing can help you attain a larger loan balance to cover any additional costs you may now have.
Before you consider refinancing a loan, you should check if your credit has improved since your approval for the initial loan. Lenders will be pulling your report as a part of their approval process for refinancing to ensure that you are a creditworthy borrower.
Your lender will offer better refinancing terms if your credit has improved because it demonstrates that you’ve been paying your bills and debts on time. Be sure to clean up your credit report by disputing errors and boosting your scores in whatever way you can before potential lenders see it.
While there are many benefits to refinancing, it can also negatively affect your credit scores. In fact, refinancing can affect your credit in different ways.
Any time you apply for a loan, the lender may check your credit report which contributes to your hard credit inquiry count. The number of hard inquiries can cause your credit scores to dip, but it depends on how many there are and how close together the inquiries were made.
Fortunately, hard inquiries will not significantly impact your credit scores, they will only have a slight impact. Part of the refinancing process is shopping around for the best interest rates and other offers. This will require a number of hard inquiries, but so long as they all occur within 45 days the inquiries will only count as one.
Keep in mind that when you pull your own credit report, this counts as a soft credit inquiry. These types of inquiries do not impact your credit scores.
By refinancing, your old loan will be closed using the funds from the new loan. This can cause your average age of credit accounts to decrease which may negatively impact your credit scores.
Keep in mind that the gravity of this impact depends on the scoring model, some models will include closed accounts in the average age of credit accounts while others won’t.
Some scoring models will consider the payment history of a closed account for up to ten years but others don’t. If a scoring model does consider the payment history of a closed account, it may not be weighted as high as the payment history of open accounts. Because payment history is heavily factored into your credit score, you may experience a sudden blow as a result of a closed account.
Luckily, your new loan will be incorporated into your payment history moving forward. To ensure that your credit can go nowhere but up, make sure to manage your new loan effectively by not missing payments or paying late.
There are two situations where you may not want to refinance. It’s important to remember that everyone’s financial situation is unique, what works for one person may not work for another. Be sure to exercise judgment as a part of your decision-making process, foregoing something small now for an immense benefit in the future could be worth it.
If you are applying for a new loan, in addition to the current one you have that you’d like to refinance, you should think twice before refinancing your current loan. You don’t want to put your new loan at risk of a higher interest rate or even getting denied in exchange for refinancing your current loan. This doesn’t mean you can’t refinance at all, just hold off until you get your new loan and then move forward with refinancing.
Also, if you are planning to refinance multiple loans, make sure to refinance the loan that will give you the most benefits first. For example, you should refinance your mortgage before your car loan because you will get much more out of it. From there, you can work your way down your list of loans.
Before moving forward with a refinancing option, deep dive into the offers you’ve been given to determine if they’ll really make you better off or not. It’s likely that you’ll get a lower interest rate or monthly payment, but be sure to consider what the tradeoff is.
Part of a refinancing deal is usually extending the loan term which is how the loan payments are lower, but it also means it will take longer for you to pay off the loan. The payments at the beginning of your refinanced loan will be mostly made up of interest, leading your total interest costs for the asset to be higher. Be sure to read the fine print, lenders may make it seem like you’re getting a better deal when in actuality you’re paying more when extending your term.
Lastly, consider qualitative factors such as the benefits that come with certain lenders. Take student loans as an example. If you’re trying to refinance your student loan and you’re considering moving away from the government to a private lender, you’re giving up the benefits of government debt. Private companies may not be as lenient about payments and terms which could hurt you down the road.
Your credit scores might take a hit when you refinance, but that doesn’t mean that it’s not worth it. The whole point of having a good credit score is to take advantage of the financial benefits, including the low-interest rates and cost savings that come with refinancing. If you have the opportunity to get yourself a better loan and put yourself in a better position, by all means, take the opportunity.
Rating of 5/5 based on 2 votes.
Veronica is a writer who specializes in creating unique and educational personal finance content. She has extensive experience writing blog posts for companies in the financial sector. Veronica's background is in accounting as she graduated from Western University in 2017 with a degree in accounting. She is passionate about using her accounting expertise to help others with their personal finance questions and issues and enjoys using her writing to educate Canadian readers. When Veronica is not writing, she enjoys film, reading, travelling, going to the gym, and listening to music.
Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.
Loans Canada is pleased to announce it placed No. 131 on the 2022 Report on Business ranking of Canada’s Top Growing Companies.
Frank Mortgage is Canada’s one-stop shop for mortgages. Get up to $1,500 cash back on your mortgage.
Great unsecured credit card for customers currently in, or recently discharged from, a consumer proposal or bankruptcy
Earn an average 5%¹ cashback at thousands of partners and at least 0.5%² cashback guaranteed with Neo.
KOHO’s Credit Building Program helps you build a better credit history with easy to manage payments for just $10/month.
All consultations and conversations with Loans Canada and its partners are confidential and risk-free. Speak with a trusted specialist today and see how we can help you achieve your financial goals faster. Loans Canada and its partners will never ask you for an upfront fee, deposit or insurance payments on a loan. Loans Canada is not a mortgage broker and does not arrange mortgage loans or any other type of financial service.
When you apply for a Loans Canada service, our website simply refers your request to qualified third party providers who can assist you with your search. Loans Canada may receive compensation from the offers shown on its website.
Only provide your information to trusted sources and be aware of online phishing scams and the risks associated with them, including identity theft and financial loss. Nothing on this website constitutes professional and/or financial advice.
