Debt Consolidation: 4 Steps to Refinance Your Loan
4 steps to refinance a loan and reduce your debt burden.
Refinancing is the process of revising the terms of a loan such as interest rate, repayment schedule and EMI with the existing lender or a different lender. In the latter case, the outstanding loan is transferred to a different lender and may also be referred to as a balance transfer. Usually, borrowers ask for refinancing of loans to lower their debt burden since refinancing leads to a lower interest rate levied on the loan.
Here is a step-by-step guide to follow if you want to refinance a loan:
Step 1: Check the prevailing interest rate offered by major Indian banks.
Whether you are repaying the loan that you got 5 years ago or 2 years ago, the interest may be calculated based on a fixed interest rate prevailing at that time. This means that if the interest rates have fallen because of the state of the economy – such as in the case of COVID-19 – then you are losing out on a great opportunity to save money. We suggest checking the interest rate of a few major banks especially competing banks before talking to your existing lender.
Step 2: Gather documents and data to refinance the loan.
To be a potential candidate for a reduced interest rate, you have to prove your creditworthiness to the lender. This may include showing income proof as well as EMI receipts of instalments you have paid in the past. Your credit score plays an important role here. Combined with the data you collected in Step 1, you are now ready to have a formal chat with the lender.
Step 3: Negotiate for a better deal.
Instead of going to another lender, first try to negotiate with your existing lender. It will save you time and, most importantly, the extra money that you will have to pay for processing and other charges when you transfer the loan to another lender.
Many experts believe that banks try to attract new customers by offering them the best deals, including a lower interest rate on loans. However, it has also been proven that it is relatively cheaper to retain a customer than to attract a new customer in any business. So while a bank may be looking for new customers, they will try to retain the existing ones too. The caveat is that they won’t try as hard.
Banks have the data about their customers which means that you are already categorised by them. If they think that you are a ‘sticky customer’ [a customer who has a credit card, a savings account and a loan with bank is likely to stay] then they will give you a minimal discount, just enough to retain you. However, if they fear losing you to competition, they may give you relatively better deals to stop you from going away.
This is precisely the reason why you must shop around. If you get a good deal from another bank, you can try to negotiate with your existing bank for a compelling quote.
Step 4: Complete the formalities to refinance the loan.
Finally, complete the requisite formalities. If the existing lender decided to give you better repayment terms including interest rate then you are all set to reduce your debt burden. However, if it did not work out as expected with your existing lender, you may have to complete documentation before your new repayment schedule commences.
A Final Word
Because of the COVID-19 pandemic, refinancing your loan or negotiating for a better interest rate can be a great option to pare down your debt since the interest rates have fallen considerably. This is the best time to get rid of excess debt since interest rates are lower than they have been in the past few years.
If you need more information about debt consolidation and consolidation loans then you can check out our consolidation loans page. We have discussed consolidation loan schemes offered by major Indian banks in detail as well as shared little-known debt consolidation tips.