What every business owner should think about refinancing a loan
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Refinancing a loan is when a new larger loan is taken to pay off a smaller loan with unfavorable terms. The new loan often comes with better rates and more convenient repayment conditions.
Loan refinancing isn’t new, and many business owners use this strategy to pay off the business loan while running their business more effectively. This article will tell you how to refinance a loan and what you need to know before doing so.
Advantages of refinancing a loan
- It can help you to repay your debts faster.
- It can help you to repay loans at reduced interest rates.
- Refinancing or consolidating multiple loans into one can help you avoid making too many numerous payments and keeping up with too many loans.
Disadvantages of refinancing a loan
- If you are not careful, the new loan could become more challenging to repay than what you were repaying before.
- You incur other additional loan processing fees.
- It could take a longer time to process than expected.
Loan refinancing options
These are some of the loan refinancing options available.
1. Work with another lender or work with the same lender
You can choose to refinance your loan with the same lender or with another lender. If the same lender is offering you another loan on better terms and they are considerate, you can work with them. If not, you need to find another lender that will give you better options.
2. Refinance one loan or multiple loans
You can choose to refinance multiple loans into one loan or refinance one loan alone. If your business has multiple loans to repay, you should refinance all of them into one. If you can’t refinance all of them, you can start with the heaviest ones while the smaller ones remain the same.
3. When is the right moment to refinance a loan?
If you’ve been missing payments consecutively, or you are so stretched out thin that you can barely afford to pay for anything after making your monthly loan repayments, you should seriously consider refinancing your loan.
If you’ve gotten a better offer from another loan company with a larger amount of money that can pay off the old debt, you should consider refinancing your loan.
How to refinance a loan
Ensure that your old loan doesn’t have prepayment penalties
Some loans have prepayment penalties for paying off loans faster than expected. This is because the lender will lose money on expected accrued interest rates. They charge a prepayment fee to cover up the lost interest rates. Don’t bother refinancing the loan If the prepayment fee is more expensive than the refinanced loan.
Study the terms of the newly offered loan carefully
Take your time and go through the terms and conditions of the loan that you are being offered. Ensure that there are no hidden charges or terms and conditions. The new loan must be better than your previous loan. There is no point in refinancing a loan if the new loan isn’t better than your previous one.
Use a loan calculator to check the total amount of the new loan
Sometimes, a refinanced loan becomes too expensive due to the administration costs, loan establishment fees, loan origination fees, packaging fees, wire transfer fees, invoice fees, etc.
A loan calculator can help you compound the total cost of these fees, so you can know the actual cost of a loan and what you’ll be paying in full. Use a loan calculator before applying for any loan.
Discuss the loan refinancing with a financial expert
A financial expert will be in the best position to tell you if loan refinancing is worth it or not. They will compare the terms of both loans, evaluate the state of your business finances and tell you their final findings. Consult a financial expert so they give you the go-ahead.
Apply for the loan refinancing with the new lenders
Apply for the loan refinancing and meet with the new lenders. The application may be online or offline. Be as accurate as possible and hold nothing back. Withholding information will only be at your detriment.
Conclusion
Opting for a refinanced loan could be the next best thing that you could do for your business. Take your time, weigh your options carefully and follow everything explained in this article. Ensure that you are getting a great deal and not jumping from the frying pan to fire.