What is Refinancing? Definition, Types, Benefits & Examples

what is refinancing

What is Refinancing? Definition, Types, Benefits & Examples

What is Refinancing: Refinancing is an alternative for those of you who find it difficult to make monthly credit payments. It is undeniable, that this kind of financial planning problem often occurs because the amount of credit interest is high enough to make it difficult for you to pay it off. But don’t worry, because with refinancing this problem can be solved.

So, what exactly is refinancing? For more details, let’s look at reviews related to the definition of refinancing in banking, its types, benefits, and examples that you should understand. Check it out!

What is Refinancing?

According to the language, the meaning of refinancing is “refinancing”. However, broadly speaking, the definition of refinancing in banking is a method of repaying loans by applying for a loan back to a credit institution with lower interest rates.

Although many think that this method is like “digging a hole, closing the hole”, in fact refinancing financing is a method that is quite helpful in reducing credit repayment problems.

For example, when you already bought a car worth Rp. 400,000,000 on credit with 8% interest at institution X, then you find out that car loans at institution Y only have 6% interest. So, you can apply for a car refinancing from institution Y to pay off your debt to institution X.

However, refinancing financing is a method that is not only limited to the loan process but also covers various refinancing contexts. So, to apply for refinancing, you must at least have an asset as collateral for a loan or collateral, such as BPKB for cars, motorbikes, house certificates, or land.

Types of Refinancing

After understanding what refinancing is, the next are the types. Refinance itself is divided into four categories, including:

1. Cash-Out Refinancing
The first type is cash-out refinancing. In this case, you buy an asset on credit and then resell it to someone else at a higher price. In a way, this is a method of refinancing when the collateral or collateral asset experiences an increase in value/price in the market.

So, you too can make cash from it. Therefore, it is recommended to use assets that are experiencing price increases in refinancing.

2. Cash-In Refinancing
The next type of refinancing financing is in the form of cash-in, where the funding is done in cash to pay off part of the debt or loan. Thus, the nominal debt continues to decrease. This is the easiest method to do.

3. Rate And Term Refinancing
Then, there is also rate and term refinancing, which is a method of paying bills for old debts using new loans with lower interest rates. This type is often the choice of many people, so it is the most common method in various loan institutions.

4. Consolidation Refinancing
Meanwhile, consolidation refinancing is a method that is not much different from rate and term refinancing, where the difference is only in the transaction system. For example, you have a debt with a fairly large amount and interest. Then, you apply for refinancing to one of the institutions to pay off the entire loan with the aim of not paying too much interest.

Also read: Top 30 Creative Business Ideas for You to Do in 2022

Benefits of Refinancing for Debtors

As said earlier, refinancing is a solution for those of you who have difficulty making credit payments due to high-interest rates. But it turns out that it’s not just that, for debtors, the benefits of refinancing are as follows.

1. Faster Loan Tenor
One of the benefits of refinancing is that it makes the process of disbursing funds faster. Because, when you apply for a refinance, you can change the loan tenor so you don’t have to wait a long time to pay the loan bill. A faster tenor will also make loan interest smaller, thus minimizing expenses.

2. Fresh Funds Are Easier to Get
Another benefit of refinancing is the ease of obtaining fresh funds. This will certainly be very helpful when you are having trouble paying loan bills or credit installments.

3. Lowering Loan Interest
Next, the benefit of refinancing is lowering the interest on existing loans. This is the reason why refinancing is often an option to solve credit repayment problems. Please note, that each loan institution usually has a different interest rate, so you must carefully determine the loan institution.

4. Matured Loan Payment Solutions
Refinancing also helps you deal with loan payments that are past due. So, by applying for refinancing funds, you can still pay off credit on time without any problems.

5. Reducing the number of monthly installments
The last benefit of refinancing is that it helps reduce the nominal bill that must be paid every month. Yes, with refinancing, your monthly installments will certainly be much less due to lower interest or a longer tenor.

Example of Refinancing

To better understand what refinancing is, here are some examples.

1. Credit Card Refinance
The first example is credit card refinancing. Yes, if you have a credit card debt bill and are having problems paying it off, you can do a refinance to pay the bill until it is paid off.

2. Refinance Mobile
Another example is car refinance. Considering the price is not cheap, cars are often the choice of credit to meet daily needs. You can do this when you buy a car on credit from dealer A through leasing X. However, because the terms of leasing X don’t suit you, you then apply for refinancing at leasing Y.

3. Home Refinance
Mortgage refinancing is one example that you can try. Not much different from other types, mortgage refinancing is an option if you want to buy a house in cash. Well, the cash can be obtained through bank loans as a form of mortgage installments.

That’s a review of what refinancing is and other things you should know. If you are indeed experiencing financial constraints, refinancing is one solution that you can try. Instead of increasing debt bills, there’s nothing wrong with applying for refinancing to provide relief.

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