Refinancing a loan—when to do it?
Yesterday a friend asked me when he should refinance his personal loan. He’s 18 months into a seven-year term, and wants to take advantage of lower rates. His conceptual trouble is that internet loan quotes are always in years, in the UK at least. This makes it difficult for him to compare his current loan with others. He’s wondering whether he should wait another six months until the comparisons make sense to him.
The general question is this: When does it make sense to shuffle your finances?
The general answer is this: When it’s cheaper in the long run to shuffle them now rather than later.
For example, his current loan has a clause that forces him to pay a penalty of two-months’ interest. Is he going to save enough on the total interest due by refinancing now? Is it going to get better or worse over time?
Some people have loans, particularly mortgages, that carry a hefty penalty if they pay it off within the first few years, and then either have no penalty or a smallish one.
He’s going to refinance it now with a shorter term and a slightly higher amount. He was going to wait until his annual bonus came through, but his car has died and he needs to replace it now. His credit-card juggling is a story for another time.