The rationale for refinancing a student loan is similar to that for refinancing many other…
You may feel like you’re stuck with whatever terms originally existed with a loan you’re currently paying back, but this isn’t always the case. Some institutions may be quite rigid and insist that the loan must stand without any changes in the terms, but in many cases you can either renegotiate and refinance the loan with the lender it initially came from, or find another lender who will work out a refinancing loan with you. But why would someone want to refinance in the first place? Weren’t they being honest when they took out the original loan? Are they trying to find a way to back out?
After the recent collapses in the financial industry and the resulting recession, it’s unlikely that this is the first thought that springs to anyone’s mind, when they think of people refinancing a loan. The financial upheavals in the world have taken a lot of people down, and left a multitude of others hanging on by their fingernails. There will always be those who use moments like this to increase their own advantages, whether they really need to or not, and this may simply be a sound investment move for some of them. But there are also vast numbers of those who want to fulfill all their obligations but whose situations have suddenly changed. The latter are people who literally need loan refinancing, not for investment purposes but because they genuinely need the financial help.
The purposes of refinancing a loan can be many. It can extend the term of the loan, for example, so the person can pay it off over a longer, more manageable period. This would likely lower the required amounts of each payment as well. These factors can be especially helpful to someone who has had to take a drastic pay cut to keep their job. With refinancing, they will still probably pay off the entire loan, rather than ending up defaulting because the new salary no longer covers the larger payments.
Usually the refinancing is done to help the person’s general cash flow. Another way to accomplish this is to refinance at a different interest rate, or to change the rate from a fixed one to a variable one (or vice versa). And sometimes a loan is refinanced to help pay off other debts.
People thinking about refinancing should exercise caution, though, because sometimes they can end up worse off than before. For example, most fixed-term loans charge a penalty for early payment, and there are also closing and transaction fees for refinancing. All of these charges may actually wipe out the potential savings meant to occur from refinancing in the first place. If that’s the case, the person may be better off tightening their belt and sticking with the original loan. They also need to keep in mind that the total interest paid in the long run could possibly be much more with a refinanced loan, if the term is extended.
The measure of refinancing should not be taken lightly. But in the recent climate of near-desperation, it’s to be hoped that many financial institutions have realized that they will get their loan money returned not by driving their customers into bankruptcy, but by helping them find ways to pay their loans back in full.