Refinancing student loans offers several benefits, especially if you’ve been diligent about managing your finances. A high credit score and low debt-to-income ratio will qualify you for a lower rate of interest. The smallest rate reduction could save you a substantial amount in accrued interest over term of the loan. The better your financials, the lower the interest rate lenders will offer you potentially adding up to thousands in savings.

Another benefit of refinancing is that is allows you to change your loan term. Most lenders will give you the option to choose from 5, 7, 10, 15 or 20 years. This is a big decision to make. The refi repayment term that you can have a huge impact on your short and long term financial circumstances. Understanding what happens when you opt for a shorter refi repayment term will help you make a more informed decision.

What Happens When You Opt For A Shorter Refi Repayment Term

When you take a loan, the principal amount and accrued interest are added and the total sum is divided into equal monthly installments. That’s the loan payments that you make every month till the loan is paid off. When you refinance with a shorter repayment term, the total amount is spread over fewer months. This increases the monthly payments.

There are major benefits to doing this. Shorting the refi repayment term means you’ll get out of debt faster, which can be a huge relief. It also lowers the total interest that accrues, adding to your savings. The benefits may be appealing but the downside is your monthly payments will be higher. You have to be absolutely sure that you can afford to make the higher monthly payments before choosing this option.

Here are 3 signs you should opt for a shorter refi repayment plan.

#1. You Have Money Left Over After Paying Your Monthly Expenses

There are certain recurring expenses that need to be met every month by a certain deadline. These may include rent, utilities, groceries, loan payments, and credit card bills. Then there are several other smaller miscellaneous expenses that can add up to a sizeable total. Are you able to meet all of these expenses comfortably every month and still have cash left over? If you do, you should consider using the extra cash towards paying off your loan faster. The way to do this is by reducing the repayment term and increasing your monthly payments.

#2. You Have A Steady Job With Good Income

Increasing your monthly payment is not a one-time thing. When you opt for a shorter refi refinance term, the higher payments must be every month till the loan is paid off. You can only afford to do this if you have a steady job or some other reliable source of steady income. This is not the right solution for you if the extra cash was a one-time gift. A shorter refi repayment term is a good option only if you meet two criteria. The first is you must have a steady consistent income source. The second is your monthly income must be enough to cover your essentials plus the higher loan payments.

#3. You’ve Already Built An Emergency Fund

No matter how careful you are, medical, vehicle, and home emergencies can and do happen. And by their very nature, they happen without any warning. Depending on type of emergency, it could cost you anywhere from a few hundreds to a couple of thousands. You never want to be without the funds necessary to sort out whatever the emergency is. One of the fundamentals of financial planning involves setting aside some cash every month towards building an emergency fund.  If you haven’t done that yet, put the extra money towards your emergency fund. If you’ve already done that, it’s a sign that you’re ready to opt for a shorter refi repayment term.

Understand The Risks Before Opting For A Shorter Refi Repayment Term

You’ve figured that you can afford the higher monthly payments and have decided to opt for shorter refi repayment term. Before you do that, it’s very important that you also take some time to understand the risks involved.

Once you sign the refinancing agreement with a shorter repayment term, you’ve committed to paying the higher monthly loan amount. This higher payment has to be made every month till your debt is cleared. If you miss a payment for any reason, it will be considered a missed payment. This can have serious consequences. The lender will charge you a hefty fine on the late payments. Your credit score will also take a hit. Choosing too short a repayment term can put you at risk of missed payments should your finances get adversely affected.

Exercise caution when choosing a refinance repayment term. It’s best to choose a term that leaves you with some wiggle room in your budget. This will give you the benefits of a shorter refi repayment term without the potential risks.