Loan refinancing: what it is and how it works

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Loan refinancing: what it is and how it works

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Loan refinancing is one of the ways to change a credit agreement previously made by a new one, negotiating more favorable payment terms for the lender.

It is very common for the installments of a loan to start weighing in your pocket after a while. After all, emergencies can happen and expenses increase, making the debt no longer fit in the budget.

In such cases, request the loan refinancing it may be the best solution for the debt not to increase.

This alternative is very useful for renegotiating the contract with lower interest or longer term to pay. Interested? Keep following the post and learn everything about it.

What is loan refinancing?

Loan refinancing is a means of replacing an old credit agreement with a new one, negotiating best payment terms.

In this way, it is possible to reduce fees, increase the payment term and even get more money, depending on the applicant’s objective.

In many cases, this is the ideal solution to overcome a bad debt, as it gives people autonomy so that they get out of your debts and regain control over your finances.

It is also an advantageous practice for financial institutions, as receiving money with less interest or more time is more interesting than taking default and leaving at a loss.

Want to know more about how loans work? Check out this other blog post: ‘6 ways to borrow money without risk’.

How does loan refinancing work?

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The loan refinancing procedure is simpler than applying for a new loan, as it is done at the same bank where you closed the contract.

It will still be necessary to go through a credit analysis and documentation, but the financial agent will probably already have all the information he needs at hand.

When refinancing the loan, the creditor institution will pay off all the remaining outstanding debt and make a new contract in accordance with the negotiated conditions. There are several paths that can be taken, such as:

  • maintain the same debt and increase the payment term, reducing the value of the installments;
  • maintain the same debt and reduce the interest rate, decreasing the value of the installments;
  • expand the credit granted and maintain the value of the installments, increasing the payment term (the customer receives the difference in the current account within up to five business days).

To hire, you can do the simulation and request online, by phone or in person, according to the institution’s rules. Then, just wait for the approval of the credit analysis and sign the new contract.

How does payroll loan renegotiation work?

In payroll loans, there is an extra factor that influences the loan refinancing process: the consignable parcel of the discounted salary or benefit.

It turns out that in this type of credit, the installments are deducted directly from the salary, retirement or EHIC pension of the client with a limit of 30%. Therefore, the value of the installments must always respect this percentage for the refinancing to be viable.

If the purpose of the new contract is to get extra credit, the amounts released will always be proportional to what has already been paid for the current loan. I.e: the more installments paid off, the greater the limit allowed for refinancing.

Apart from this detail, the loan refinancing process proceeds normally. For example: imagine a customer who still owes R $ 3,000 in 12 installments and wants to refinance to borrow another R $ 2,000.

In this case, the institution will pay the R $ 3 thousand and make a new contract of R $ 5,000, with the number of installments and interest negotiated with the client. The difference of R $ 2 thousand is deposited in the customer’s account and the payment continues to be deducted directly from the payroll.

It is worth remembering that the maximum terms for the duration of consigned contracts are:

  • 48 months for private workers;
  • 60 months for military personnel;
  • 72 months for EHIC benefits;
  • 96 months for public servants.

What is the difference between refinancing and a new loan?

Loan refinancing improves the payment terms of an existing contract and it must be done by the same institution in which it was signed.

A new loan, on the other hand, means a credit granting made from scratch, whose money can be used for any purpose, whether it is paying off an old loan or not. It can be requested at any bank or financial agent.

To renegotiate the terms of an existing loan, refinancing is the best alternative, but it is not always possible.

For example, it is not allowed to refinance a loan before paying the first installment. In most institutions, in fact, it is necessary that part of the debt is already paid in order to redefine interest or terms.

In this situation, if the person needs to improve the payment terms, they will have to get a new loan with lower interest rates and more installments, replacing one debt with another.

It is also possible that the bank did not want to refinance the loan or does not offer payment terms that are better than the initial ones.

If this happens, it is a good idea to take out a new loan or debt portability to another financial one, transferring the debt and refinancing there.

When to refinance a loan?

It is always worthwhile to exchange an expensive debt for one with lower rates that fits your budget better. So, do not hesitate to refinance or get a new credit, depending on your situation.

Loan refinancing can also be advantageous in the case of fixed rate loans. With the variations in the Selic rate, redoing the contract may be a good option to reduce the interest agreed upon when contracting.

That way, you can search prefixed smaller or exchange for a fee post-fixed, betting on a change in the economic scenario.

What are the advantages of loan refinancing?

In addition to cheapening your debt, refinancing a loan is worth it in many other ways. Check out the main benefits of the sport below.

Less bureaucracy

With a contract already in force between the client and the finance company, the loan refinancing process is much simpler than a new contractsince the company already has the applicant’s documents and data. For the same reason, the new contract and possible extra credit are released more quickly.

Possibility of increasing the loan amount

As mentioned earlier, loan refinancing also allows for the hiring a larger amount of credit, the so-called “change”. In this way, the customer who needs more money borrows can borrow it with installments and interest equal to or even better than in the first contract.

Flexibility of deadlines

When thinking about refinancing, many people think only of the possibility of reducing the interest on the contract. However, being able to negotiate a longer payment term it is also an excellent advantage, as it is a way to dilute the amount to be paid month by month.

Help your employees not to get into debt

Now that you know what loan refinancing is, you are ready to negotiate if you need to ease your monthly budget.

Organize your expenses, run simulations and talk to your financial agent to reach a good deal for both parties.

With a good benefit policy, companies can help their employees stay out of debt and keep personal payments on track.

Get to know the HR Consultant UKy tool and learn how the system that implements payment on demand works, that is, employees of a company can anticipate part of their salaries when they need it.

This tool is changing the way employees deal with their wages and generating more job satisfaction and motivation.

HR Consultant UKy can be one of the most valued benefits for those who work at your company. Talk to an expert and find out more!

Did you like the article? Tell us in the comments about your experience with loans and refinancing. We are available to answer any questions you may have on the subject!

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