Refinance loan

Training 485 minutesrefinance loan

You are 36 and work at a hospital. You owe $12,000 at 24% over 4 years, paying $391 a month. Your credit is better now and banks offer 14%.

Training goal: Cut the total cost, not just the payment

Situation

1. A bank offers to refinance the $12,000 at 14% over the same 4 years. The payment drops to $328.

2. Another bank offers the same 14% but over 6 years. The payment is just $247. Both banks allow early repayment with no fee. You have $1,500 saved.

3. The new loan has a $500 setup fee and $15 a month of life insurance.

4. The loan is refinanced. The old debt grew out of credit cards. The bank immediately offers a card with a $5,000 limit.

Refinancing pays when the rate is clearly lower. A longer term only makes sense with a plan to prepay.
Count every fee and insurance in the switch.
Do not refill freed-up credit with new debt.

Check the rate and balance on your most expensive loan. Ask two banks what they would offer to refinance it.

When does it make sense to refinance a loan?

When the new APR is several points lower, fees are small and the term does not grow.

Does refinancing hurt my credit score?

A new application causes a small, short dip. On-time payments on the new loan soon outweigh it.

Can I combine several loans into one?

Yes, that is debt consolidation. It helps if the combined rate is lower and you do not refill the old cards.

Numbers are illustrative. A game, not financial advice.