What Is Refinancing and How Does It Work?

Refinancing, ideally referred to as loan transfer is the process of transferring your existing loan account to another bank or non-banking financial institution with the aim of getting a lower interest along with better services. If you’re not satisfied with your high-cost loan, don’t lose hope as it is possible to move your loan from your existing lender to a new one and save a substantial amount of money.

Well, how does refinancing work? Well, the process of a loan transfer is quite straightforward and we are going to take a closer look at how it works in this brief post.

The first step is to initiate the transfer process by writing a transfer request letter to your current lender. Upon receiving the letter, your lender will review your application an issue a No Objection Certificate along with your payment history.

Once you get the documents mentioned above, you’ll need to submit them to the new lender, where they will be thoroughly verified to ascertain you’re capable of repaying the loan.

After the verification, the new lender will prepare for your account closure by sanctioning the loan amount to your former bank or lending institution. Once the transaction is done, your documents will be turned over to the new lender.

Since refinancing is treated as a new loan, you’ll have to undergo the procedures of technical and legal verification, along with credit appraisals which are done by your new lender. Keep in mind that when your loan account is transferred to the new institution, you will have to pay a loan processing fee. This is one of the biggest cons of refinancing as the costs can be pretty high depending on the amount.

This is generally how refinancing works. However, before you transfer your loan, there are a few important things to keep in mind:

  1. Before refinancing, ensure you go through the terms & conditions including the processing fees, legal charges, stamp duty and other fees you may encounter during the process.
  2. Try and make the transfer during the initial years of the loan. Doing this after three or four years won’t reduce your interest burden as you’ll have paid a large part of the interest by that time.
  3. Before refinancing, it is advisable to compare the interest rates offered by various lenders so that you can find the best ones. At the same time, you should try negotiating with your current lender for better terms and a lower interest rate before deciding to move to another bank. Lastly, only consider refinancing if it results in substantial long-term benefits.