Circumstances can and do change. Often, what might have been a very good financial decision at one point may require an alteration at another point. Such is often the case when you take out a loan. What might have been a good interest rate on a personal loan, a credit card, a home mortgage, or an auto loan two years ago might become a very troubling interest rate in the present. For those suffering from high monthly loan payments, refinancing may prove to be the best option to explore.

Refinancing is best described as taking out a new loan to pay off an old one. On the surface, the notion you use one loan to pay another seems illogical. Would you not be in the same position just with a new loan? No, because the purpose of the new loan would be to reduce the monthly interest rate, lower monthly payments or do both.

Lowering monthly payments can have a huge effect on your budget. Imagine taking out a loan that requires $250 payments a month for five years. That comes out to $3,000 a year drained right out of your budget. For the first two years of repaying the loan, the impact was not so significant. In the third year, however, that $250 a month proved to be extremely straining on a budget. Since a large amount of the balance has been paid off, refinancing the loan would mean a much lower monthly payment. One lender offers a new loan at a fair interest rate. The monthly payments would come out to $100 a month. Doing the simple math, this means you would regain $2,400 a year back into your budget. Certainly, that would be a significant amount of money to someone that is suffering from fiscal woes and stress.

Lowering interest rates would also have an impact on how much your pay per month on a loan. The higher the interest rate, the more the monthly payment will be. So, refinancing to a lower interest rate will mean you have a lower monthly payment. Some borrowers overlook this fact and end up paying a lot more as a result.

As far as paying more is concerned, just because your minimum monthly loan payment has been lowered does not mean you cannot pay more if you wish. At some point, you may want to pay off the loan with higher payments. You can definitely do so. The benefit here is prior to making a payoff you do not have to be locked into high monthly minimum amounts.