Refinancing a loan: What are the advantages and disadvantages?

Refinancing loans can have clear advantages. In general, you transfer a loan if you have to pay a lower interest rate elsewhere. But does that also mean that the new loan will be cheaper in the future? What are the costs for refinancing? What is penalty interest? When does it make sense to switch to a new provider with one or more existing loans and when not? Must read when refinancing!

What are the advantages of transferring a loan?

If you have taken out a loan at a relatively high interest rate or when the interest rate was relatively high, it may be useful to see whether refinancing is an option. Even if you have multiple loans for which you pay costs, interest and repayments separately, transferring to one new loan is certainly an option to consider. Transferring an existing loan or multiple existing loans to a new provider generally provides a few clear advantages:

  • Lower interest than before and therefore lower monthly costs
  • Lower costs when you reduce multiple existing loans to one new loan
  • A lower interest rate when you reduce multiple existing loans to one new loan
  • The ability to repay and dispose of loans in arrears
  • The option to make more or less monthly repayments in addition to the interest compared to the current situation
  • The opportunity to change providers if you are less satisfied with the current lender

What are the disadvantages of transferring loans?

Sometimes a provider has taken measures in the credit agreement to discourage refinancing. This is often done by including a so-called penalty clause, which indicates that you must pay penalty interest or a one-off penalty upon departure. It may also be that you cannot exit at any time, but that you can, for example, only terminate the loan with the current provider once a year to take out a new loan elsewhere. If this is the case, you must carefully weigh the benefits on an annual basis against what you have to pay for the transfer. Do the benefits in this case outweigh the costs or not? Will it be cheaper if you decide to refinance? Furthermore, it is particularly important that you not only look at loans with a lower interest rate. A low interest rate is important for a loan, but the specific conditions are just as important. What additional costs do you pay for the new loan? Are the costs you pay less than you now pay for your current loan or loans? Is there a need for collateral to obtain a lower interest rate? Do you qualify for the low interest rate that is being promoted? Please realize that the interest rate you are offered may differ from the lowest possible interest depending on your income, behavior with regard to repayment in the past and any BKR listing.

When do you choose to transfer a loan and when not?

Refinancing is often more favorable if you took out your loan or loans in a period that was unfavorable in terms of loan interest. If the interest rate is fixed and is now much lower than then, refinancing is definitely worth investigating. Even if you have multiple loans from multiple providers, refinancing can be very beneficial. Not only because of the costs you save, but also because with one loan, where you borrow a relatively large amount, you are generally offered a much more favorable interest rate than for separate smaller loans. If getting out is expensive or you cannot get out when you want, you must carefully consider what is best: Switch or stay with the current provider. Even if the conditions of the new loan are worse, you have to be careful: Are you going to pay more additional costs than before? Should you offer your house or car as collateral? Do you really get the low interest rate that is promised in practice?

Weigh interest, conditions and costs carefully before making a decision to actually transfer one or more loans. Explore different providers and request quotes from multiple lenders so that you can properly compare loans. Quotations are personal and you can hold the provider to them. Investigate the advantages and disadvantages of refinancing and choose a situation in the future in which your monthly costs are actually lower than before.