Refinance, What Does That Mean? Part 1

October 16, 2015 No comments exist

If you do not know what it means to refinance, don't worry. You are not alone.  Many individuals have never refinanced a loan so it's expected they would not know what it is.  However, refinancing, especially a student loan, can be one of the most powerful tools you have to manage your personal finances. This article gives you a high level overview of what refinancing a student loan means.  As always, if you find this article helpful please like it and share it with your friends.  They most likely have the same questions you have.

Refinancing a Student Loan

Refinancing a student loan occurs after you graduate from school.  Private lenders and finance companies consolidate your loans and typically lower your monthly payment.  There is one key difference between refinancing and debt consolidation. If you only consolidate debt then your interest rate, or the rate of return the financing company wishes to receive, does not change.  If monthly payments decrease, it's due to a lengthening of the term of the loan.  When you refinance a student loan, you are changing the interest rate (most likely to a lower rate).  Since most individuals have multiple student loans, when they refinance with a private company, they are both refinancing and consolidating their student loans.  For example, assume you have two loans.  Loan 1 has 10 years remaining, a balance of $10,000, and an interest rate of 6.9%.  Loan 2 has 10 years remaining, a balance of $10,000, and an interest rate of 8.0%.  With a private finance company, you could consolidate the two loans into one 10 year loan with a balance of $20,000.  You could also refinance the loan to a lower rate, let's say 5.5% and/or change the term.  The reason debt consolidation and refinancing are often confused is that this process often occurs simultaneously.

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