Out of all the financial products banks offer, one of the most powerful and useful said products is loan refinancing. When used correctly, refinancing can help save money but it can also help avoid financial disasters.
Claiming that loan refinancing can save you money may not make sense. In reality, refinancing a loan can help you reduce the interest you pay. Most banks offer special interest rates when refinancing loans. This means that you pay less money back to the bank on the borrowed amount. When you refinance, the bank pays the principal on an existing loan or multiple loans and offers you a new loan for the same amount or more but at a lower interest rate.
Another smart way to use loan refinancing is to reduce the total amount of monthly debt you have to pay. When monthly payments become too difficult to cope with due to whatever financial hurdles you may have, loan refinancing can be a saving grace. The alternative, to fall behind on your payments, will negatively impact your credit score. Recovering from a bad credit score takes a very long time. Until you get your score back up you will not be able to access loans from most banks.
Beyond the two situations above, loan refinancing should rarely be used. It can be used when you need extra money and can handle the monthly payments. The only advantage you get is a single monthly payment each month instead of having two separate loans. What you need to note is that using refinancing products will cause you to pay more in interest on your existing loan. The interest represents the vast majority of your monthly payments in the first couple of years. This means that if you refinance an existing loan, odds are you already paid most of the interest for it and you will have to pay interest on the remaining amount once more.