Refinancing a loan offers useful advantages to some lenders, but these should be balanced against possible disadvantages. One concern of many borrowers is the effect of extending a loan’s term with a refinance plan.
Some people refinance an existing loan to get a lower interest rate. This can work well for long-term loans or those with higher interest rates. However, the loan term will have to be extended as well, which means the borrower will be making more payments over a longer period of time.
Similarly, some consumers refinance a loan so they can make smaller payments. While it is true that the monthly payment will be reduced, the borrower will have to make more payments over the life of the loan. This option is helpful for those with short-term income limits who do not expect their cash flow issues to ease over the loan period.
Much depends on the purpose of refinancing a loan. Lower interest or smaller payments can be advantageous to some. But there may be repercussions to extending a loan, too.
For example, reworking an existing loan to make payments over five years instead of three means that a person’s available credit will be tied up for a longer period of time. If more credit is needed down the road before the loan is paid in full, there may not be enough available credit if the borrower has a high income-to-credit ratio. Any unexpected emergencies may not be able to be met through credit if a long-term loan is using much of the available credit line.
Maintaining an ongoing loan that utilizes much of the person’s available credit may likewise impact his or her credit score. Having too little credit available or using too much of it may lower the credit rating.
Of course, if it comes down to extending the loan to make smaller payments or defaulting on an existing loan, it is better to refinance and meet the payment due-date each month to maintain a healthy credit score. Missing a payment or being late can ding the credit rating and complicate a credit record.