How to Properly Refinance a Loan to Save Money?

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Are you paying off a loan taken out years ago, but recently noticed that banks are offering much lower rates? It's worth considering refinancing – you might be able to transfer your loan to a more favorable interest rate and significantly save on overpayments.

Over the past few years, Armenian banks have been gradually lowering rates, and more advantageous conditions are appearing on the market. Meanwhile, the terms of your current loan might not seem as good anymore. But there's a solution: you can transfer your loan to another bank with better terms and a lower interest rate. This is called refinancing.

We'll explain how loan refinancing works in Armenia, when it's beneficial, and how to complete the process correctly, without unnecessary headaches.

What is Refinancing?

Refinancing is the replacement of one loan with another. Almost always, it's with a different bank and under more favorable terms. You take out a new loan, pay off the old one, and continue to make payments, but now at a lower amount.

What can be improved through refinancing:

1. Reduce the interest rate;
2. Extend the repayment period;
3. Lower the monthly payment;
4. Decrease the total overpayment;
5. Consolidate several loans into one.

Example: How much can you save?

Imagine you took out a mortgage 3 years ago for AMD 15,000,000 for a period of 15 years at 14% annual interest. At that time, your monthly payment was approximately AMD 199,761.

Now, mortgage rates have dropped to 8% per annum. After refinancing, the payment could decrease to AMD 143,348.

Savings:

1. Per month: approximately AMD 56,400
2. Per year: about AMD 676,960
3. Over 5 years: more than AMD 3.38 million

And this is just the savings on monthly payments. Additionally, you can reduce the total interest overpayment if you choose a shorter term or a bank without additional fees.

Why Now Is the Right Time?

Since the beginning of 2023, Armenia has seen a trend of decreasing key interest rates. The Central Bank has lowered it from 10.5% to 6.75% – and this has directly impacted interest rates on mortgages and consumer loans.

Banks have started offering refinancing under new conditions: often with zero commissions, without income analysis, with a choice of loan currency, and for a longer term.

You should refinance your loan if:

1. The interest rate on the new loan is at least 1–1.5 percentage points lower.
2. There is still a long time left until the end of your current loan term (it's best to refinance within the first 2–5 years).
3. You have a good credit history and stable income.
4. You want to consolidate several loans and make one monthly payment.

You can refinance mortgages, car loans, consumer loans, secured loans, and credit cards.

You can even combine all of them into one and pay in convenient installments. This is called a consolidated loan.

What to Pay Attention to Before Refinancing

Before applying, it's important to calculate everything down to the last dram:

1. Fees. Even with a lower rate, the benefit might be "burned up" if there are fees for origination, insurance, or collateral appraisal.
2. Loan term. A longer term means a lower payment but a higher overpayment.
3. Payment schedule. Clarify the date of the first payment on the new loan to avoid paying two loans simultaneously.
4. Interest rate type. A fixed rate offers stability, while a floating rate carries the risk of an increase if the Central Bank raises its rate.

How to Apply for Refinancing: Step-by-Step Guide

1. Check the terms of your current loan: rate, remaining balance, term.
2. Compare offers from other banks.
3. Calculate the benefit: how much you will save over the entire term, considering fees.
4. Prepare documents: passport, income statement, current loan agreement, possibly collateral appraisal.
5. Submit applications to several banks.
6. Receive approval and pay off your old loan.

What to Do If You Are Rejected?

Reasons for rejection include a poor credit history, a high debt burden, or unstable income. In this case:

1. Improve your credit history (clear up overdue payments);
2. Officially confirm your income;
3. Try applying to another bank;
4. Consider restructuring with your current bank.

There are other ways that can replace refinancing.

You can:

1. Take out a consumer loan secured by collateral and pay off the old loan;
2. Increase your monthly payment – and pay it off faster;
3. Contact non-bank credit organizations;
4. Find additional sources of income;
5. Utilize payroll programs (e.g., refinancing on behalf of your employer).

Conclusion

We've explored how to properly refinance a loan to save money.

You should do this if market rates have decreased, but you are still paying under old terms. Calculate the benefit, compare offers, and arrange refinancing where it will genuinely improve your financial situation.

Current bank offers, rate comparisons, and assistance in selection – all of this can be found on AFM. Find the best option and avoid overpaying!