Similar to refinancing a home loan, there is an option to refinance your personal loan. Personal loan refinancing comes with two options—refinancing with the same bank and switching to a different bank. It is you who has to make a choice between the two available options. Just don’t forget to keep yourself on the side that is profitable for you.
Read through the article to a make better decision about your personal loan refinancing.
When Refinancing is a Good Option
- High Interest Rate: Let’s say you took a personal loan about 3 years ago. The interest rates in the market may have reduced now. Instead of sticking on to the initial policies and paying high-interest rates, you can refinance it. So, you pay some extra ringgits towards the principal and clear your loan quicker at a lower interest rate.
- Switching the Bank: If a bank offers the loan with a reasonable repayment tenure and a lower interest rate, then why not switch your existing loan to a different bank? Most banks in Malaysia welcome you to refinance your loans taken from a different bank at competitive rates.
- Insufficient Repayment Tenure: If you have not been punctual in paying monthly instalments, then you wouldn’t be able to clear the loan by the end of the specified loan tenure. If you are about to reach the end of the tenure and still have a considerable amount to be repaid, then it makes sense to refinance the loan.
- Unaffordable Monthly Instalments: You may be in a situation where you have sunk financially and cannot afford to pay the specified monthly instalment anymore. You can consult the bank and request them to refinance your loan. The bank will give you a fresh instalment amount that is to be paid and repayment tenure. If you don’t need additional cash in hand, you can choose to refinance only for the remaining loan amount. Then, you will be paying a smaller sum every month and get enough time to repay.
- Extra Cash Requirement: Refinancing can be an option when you have a sudden need for cash and there are no better options to get cash.
What You Need to Consider
When you decide on refinancing your existing personal loan, you need to consider a number of factors about both the existing and the new loan. Ignoring them may cost you a lot more than they seem.
- Loan Redemption Fee: You have to pay loan redemption charges to a lawyer to redeem your loan following the required legal procedures.
- Loan Documentation Charges: When it comes to a new loan, you may be charged a certain amount for documentation. If you are refinancing with the same bank, the loan documentation charge may be minimal or null as the same documentation will be used to carry the loan forward.
- Early Settlement Penalty: If you settle your loan before the bank-specified loan tenure, you will be asked to pay an Early Settlement Penalty. The bank may charge a sum equivalent to the total interest amount you would pay during the rest of the loan tenure. This is because the bank incurs a loss as you wouldn’t pay the interest amount for the remaining tenure.
Pieces of Advice
- Check Credit Score: It is good to have some knowledge of your credit score if you are considering to switch to another bank. When you know your score, you can have an idea on how much loan amount you can expect by refinancing. If the score is low, it would indicate that it is difficult to get an approval from a new bank. So, you can continue with your existing bank even if it is a bit higher on the interest side.
- Research: Research on the different schemes available at different banks of Malaysia. Check for their fees and charges; interest rates; nature of the interest rate—variable, floating, or fixed; repayment tenure; the maximum loan amount offered; and other service-related factors. If you still think your bank gives the best deal, then continue with the same. Otherwise, refinance your loan at a bank with a better offer and clear the loan in the current bank.
- Talk to the Bank Staff: If you are refinancing because of the affordability factor, then before you apply for refinancing at a new bank, talk to the bank staff. If you have been a loyal customer at the current bank so far and if there is a sudden financial crisis, then try talking to the staff and request if they could make some arrangements to reduce the instalments for a period of time. If it doesn’t work out well, then visit the new bank you have chosen after your research. Explain the situation to them and then move ahead if the bank staff give you thumbs up.
If you think you can somehow manage to clear your existing personal loan, then that is good enough. You don’t have to go through the hassle of refinancing it. If you are not left with an option, then refinancing your personal loan will give you enough time and space to breath. Keep in mind that by refinancing your loan, you will be paying more money from your pocket.