When you refinance your business loan, you’re essentially paying off your existing loan by taking a new loan at a lower interest rate. Then, you continue to pay smaller EMIs for your new loan. Thus, you can save money on interest payments in the long term with a loan transfer.
However, refinancing a loan has its advantages and disadvantages. So, if you are yet to decide whether or not to take the leap, this article can help you.
Here are some of the pros and cons of refinancing.
Pros of loan refinancing
#1 It can improve your cash flow
When you refinance your loan at a lower interest rate, you will pay much lower EMI amounts for the rest of your tenure. Reducing the EMI amount is advantageous for entrepreneurs who want to maintain a steady monthly cash flow for a growing business.
If you want to figure out how much EMI amount you can save every month, use a business loan EMI calculator. It is a handy tool that will calculate the EMI values and interest payable for you.
Just enter your pending loan amount and the remaining tenure. Then, evaluate the EMI amount and interest payable against the old and new interest rates.
#2 It will improve your DTI ratio
Your debt-to-income ratio (DTI) is the ratio of your total obligations towards debts to your monthly income. For most business loan applications, lenders prefer candidates with a DTI of 40% or lower.
With a loan refinancing, you can lower your EMI amount and DTI ratio in effect. As a result, your business loan eligibility also increases.
So if you ever need to approach a lender for any additional funding, your chances of approval will be high if your DTI is low. Not to mention, a lower DTI will make your business more attractive to investors or potential buyers.
Cons of loan refinancing
#1 It may not be worth the hassle
Refinancing your loan at lower interest rates may not always be ideal. While you might enjoy lower business loan interest rates, you need to consider other costs. These costs include processing fees, prepayment charges, and foreclosure charges imposed by your lender. If these charges are high, they may add up to a considerable amount and eat into your interest savings. Ultimately, loan refinancing will not be worth the hassle.
#2 It may negatively impact your credit score
When you refinance your loan with a different lender, it is equivalent to availing of a new loan. Therefore, as per the set procedure, your new lender will request to review your credit report. This request will show up in your credit report as a hard inquiry. And unfortunately, hard inquiries have a harmful impact on your credit score, which lasts for a year.
So, should you go for refinancing?
At the end of the day, refinancing your loan is your decision alone. So, make sure it is an informed one. Consider all the pros and cons of refinancing and how they can affect your business. Finally, do the math, estimate your EMIs with a business loan EMI calculator, and get a clear idea of your savings.