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Wooden plaque with the word refinance.

How and When to Refinance a Personal Loan

When faced with financial challenges or seeking better terms, individuals often contemplate refinancing their personal loans. Refinancing offers the potential for improved interest rates, reduced monthly payments, or a change in loan terms. 

Key Takeaways

  • Refinancing a personal loan should depend on specific scenarios like low interest rates or better loan terms.
  • Furthermore, if your income increases or overall financial stability improves, it may be an opportune time to explore refinancing.

What Is Refinancing 

Refinancing a loan involves settling your existing loan by obtaining another loan, typically with a lower interest rate. By doing so, you aim to reduce your overall loan costs over time, provided you don't extend the loan term.

You don't have to refinance through your current lender. You can seek a different lender offering a more favorable interest rate and use their loan to repay your existing one. Following this, you will make payments according to the terms and interest rate agreed upon with the new lender.

What Does It Mean to Refinance a Personal Loan?

Refinancing a personal loan involves replacing an existing loan with a new one, typically under different terms. This may include securing a lower interest rate, extending the loan duration, or even changing the lender. The primary goal is to achieve more favorable loan terms, potentially reducing overall costs and making repayments more manageable.

Pros of Refinancing a Personal Loan

If you are thinking of refinancing a personal loan, here are the positives:

  • Lower interest rates. Refinancing can lead to a lower interest rate, resulting in significant savings over the life of the loan.
  • Reduced monthly payments. Extending the loan term can lower monthly payments, providing immediate financial relief.
  • Change in loan terms. Borrowers can modify loan terms to better align with their current financial situation.
  • Simplified repayment. Combining multiple loans into a single, refinanced loan can simplify the repayment process.

Cons of Refinancing a Personal Loan

And, here are the negatives:

  • Extended loan duration. While it reduces monthly payments, extending the loan term may increase the total interest paid over time.
  • Upfront costs. Refinancing may involve fees and closing costs, impacting short-term financial considerations.
  • Potential impact on credit score. The refinancing process may temporarily affect your credit score, though the impact is often minimal and short-lived.

When Should You Refinance a Personal Loan?

You should refinance a personal loan to act on lower interest rates or if your credit score jumped up.

Refinancing a personal loan is a nuanced financial decision that demands careful consideration. Understanding the optimal timing for such a strategic move is crucial for maximizing its benefits. Here are detailed scenarios and considerations for when you should contemplate refinancing:

1. Interest Rates Are Low

Interest rates fluctuate over time due to economic conditions. When the market experiences a decline in interest rates, it presents an opportune moment to consider refinancing your personal loan.

Monitor market trends and stay informed about prevailing interest rates. If rates have significantly dropped since you initially took out your loan, exploring a refinance can result in substantial savings. Lower interest rates translate into reduced overall interest costs, potentially leading to lower monthly payments.

2. Your Credit Score Improved

Your credit score is a dynamic factor that evolves over time based on your financial behavior. A noteworthy improvement in your credit score can open doors to more favorable loan terms.

Regularly check your credit score and credit report. If you've diligently worked to improve your creditworthiness by paying bills on time, reducing outstanding debts, and managing your finances responsibly, your credit score may have experienced a positive uptick. A higher credit score can make you eligible for lower interest rates and better loan terms, making it an opportune time to explore refinancing options.

3. You Recently Paid Off Debts

If you recently paid off a major debt, you should consider refinancing. This means that you have a better debt-to-income ratio, which will look better to lenders.

Combined with a better credit score and credit history, this could make you eligible for one of the lower personal loan rates. If you had previously gotten a loan with a wildly high rate due to these factors, it would be smart to think about refinancing, since it will save you a lot of money over time.

Why Should You Refinance a Personal Loan?

You should refinance a personal loan if it will save you money.

Refinancing a personal loan will give you a plethora of advantages depending on the goal you have. This can include everything from getting a lower interest rate to reducing the overall cost of the loan. 

  • Can pay off your loan faster. If you decide to take on higher monthly payments, you can end up getting out of debt faster by refinancing a personal loan to a shorter term. This will also allow you to reduce the amount of interest you will be paying over the period of your repayment term. 
  • Better interest rates. You can save money over time on interest by refinancing your personal loan. Lenders will offer this if your credit score has improved since your original loan, or if rates have dropped. 
  • Stability with payments. If you had a variable rate, switching to a fixed rate will help you know exactly how much you should be budgeting for every month. 
  • Extend your repayment period. If you are having trouble paying your loan, this can be the best way to manage it. By extending your repayment period, you are giving yourself lower monthly payments that may be more manageable for you. 

How To Apply for Refinancing 

If you decide you want to refinance your loan, here are some steps you should take to do so. 

Find out How Much Money You Still Need

To refinance a loan, you will need to pay off the existing loan. Before you figure out the fees and rates, you need to determine the amount of money you need to pay off your current loan. When doing this, you should also figure out if your lender charges prepayment penalties. In some cases, this could outweigh the benefits of refinancing your loan completely.

Knowing this amount is the most important step to refinancing because you will need this amount to be completely free of the original loan you took out. Thankfully, this is also a fairly easy step to take. You can usually just log into your account to find the balance, and you should be able to find out about prepayment fees there, as well.

Check Your Credit Score

If you are trying to refinance a loan to get a lower rate, you’ll have to check your credit score and credit report, first. This is to gauge whether you will qualify for these lower rates, or if you will likely just get the same rate. If your credit score has improved, and your rate comes back significantly lower, it will be worth it to refinance.

When looking around for a new loan, it’s also important to figure out whether a lender will do a soft pull or a hard pull of your credit score before giving you a quote. If they do a hard pull, it will negatively affect your credit score in the short term, which won’t do you any good if you end up not choosing them.

Try to only get quotes from a lender that will give you their rates after doing a soft pull, which is considered a prequalification.

It is also important to keep in mind that lenders will often quote their best rate, but you may not qualify for it based on your credit score. You can request a free credit report annually from all three credit bureaus.

Have a Conversation with Your Current Lender

Your current lender may be able to offer you a better deal than the one you currently have in order to keep your business with them. It’s important that you don’t overlook them in your search to find a better deal!  

Having a loan through a company means that you have an established relationship with them. If they assess your eligibility for a new loan, some lenders will allow you to see if you are prequalified without doing a credit inquiry.

It is important to note, however, that if you refinance with your current lender, you may have to pay an origination fee. They will let you know the exact amount, but this can be anywhere from 1% to 10% of the loan amount.

Figure out if you will be charged with this fee and ensure that the loan amount you get after this is enough to completely refinance the original loan you must pay off.

Look for New Rates and Terms

You can do this by looking at different banks and online lenders. When trying to find the perfect place to refinance a loan, you will want to do a lot of research. Before refinancing, you should consider comparing rates and terms from a handful of different lenders before agreeing to anything.

Don’t try to rush the process because it could end up hurting you in the end. Shop around for your new loan, because each and every lender will have different interest rates and loans.  

Apply for the Loan

Now all you have left is to apply for the loan. When applying, you are going to want to submit your application to the lender you have decided to choose, providing any and all required information they want. This could be your social security number, pay stubs, tax documents, or even bank statements.

Although refinancing a loan is a little different than applying for a loan in general, to get the refinancing, you must still submit the formal application much like you would with a regular loan. This means going through all the same steps, such as being approved, submitting documents, and having that formal application.

Make Payments

After you get approved for the refinancing, you will need to pay off the existing loan. To avoid any unnecessary interest or double loan payments, you should do this as soon as possible.

When you get your new funds, this will start your repayment period. You will want to begin making monthly payments right away, keeping in mind the new interest rate, repayment timeline, and monthly payment amount.

Make sure that you are still making your monthly payments on time so that your account stays in good standing, and it will not hurt your credit score, which would hurt you more in the long run, possibly causing you to not be approved for future loans.

Does Personal Loan Refinancing Affect Your Credit Score?

Refinancing your loan may cause a temporary dip in your credit score because of the credit inquiry.

While the refinancing process may result in a temporary dip in your credit score due to the inquiry and the opening of a new credit account, the impact is usually minor. Over time, responsible management of the refinanced loan can contribute to overall credit score improvement.

Can You Refinance Your Personal Loan with a New One from the Same Lender?

Yes, it is possible to refinance a personal loan with the same lender. Contact your current lender to discuss the possibility of modifying the existing loan terms. Some lenders offer incentives or special programs for existing customers seeking to refinance.

Can You Renegotiate Your Current Personal Loan Instead of Refinancing?

Yes, in most cases renegotiating your current personal loan is an option worth exploring. Contact your lender to discuss potential modifications to your loan terms. While not all lenders may offer this option, some may be willing to work with you to find a mutually beneficial solution.

Reasons You May Not Want To Refinance a Personal Loan

Refinancing a personal loan may be a bad idea if you are doing it out of desperation.

Some drawbacks may include:

  • Prepayment penalties. As mentioned previously, you will want to figure out if your lender charges prepayment penalties. This is when they charge you a penalty if you pay the balance off before the end of the term. If you pay off your existing loan with your refinanced loan, this is a huge factor you should not overlook.
  • Impact on your credit score. When there is a new loan inquiry, there is a chance it can lower your credit score. This is usually minimal and temporary, but if you have multiple lenders inquiring, and don’t go with most of them, it could really hurt your score. 
  • Possible higher interest cost. Extending your loan can have many benefits to you, but a negative is that you may have higher interest costs the longer your repayment period is. So although you may be able to afford the monthly cost better, over time you will be spending way more money with interest costs. 
  • Other fees. There will be other fees, as well, such as additional lender fees. These may reduce the benefit of refinancing your loan and should be accounted for. 
  • Time spent. The time you spend researching different lenders, comparing all of their info, and submitting applications may not be worth the hassle for you. To make the most out of refinancing your loan, you should put a lot of time and care into doing this, which is time you may not have. 

Does Personal Loan Refinancing Affect Your Credit Score?

Refinancing your loan may cause a temporary dip in your credit score because of the credit inquiry.

While the refinancing process may result in a temporary dip in your credit score due to the inquiry and the opening of a new credit account, the impact is usually minor. Over time, responsible management of the refinanced loan can contribute to overall credit score improvement.

Can You Refinance Your Personal Loan with a New One from the Same Lender?

Yes, it is possible to refinance a personal loan with the same lender. Contact your current lender to discuss the possibility of modifying the existing loan terms. Some lenders offer incentives or special programs for existing customers seeking to refinance.

Can You Renegotiate Your Current Personal Loan Instead of Refinancing?

Yes, in most cases renegotiating your current personal loan is an option worth exploring. Contact your lender to discuss potential modifications to your loan terms. While not all lenders may offer this option, some may be willing to work with you to find a mutually beneficial solution.

Overall, Is It Best To Refinance a Personal Loan?

It depends on your circumstances, but if you qualify for a lower rate, it is best to refinance a personal loan. This can happen if you lower your debt-to-income ratio or improve your credit.

 It can also help you make room in your budget by either lowering your monthly payment or increasing your monthly payment, so you pay it off faster. Both will help you; it just depends on if you want short-term benefits or long-term benefits. 

Final Thoughts

Can you refinance a personal loan? Absolutely.

Research is the keyword when you are looking to refinance a loan. Many times, refinancing will not be beneficial to you, which is why you must look into several lenders to find one that will work.

Take all the factors into consideration. What is your ideal interest rate? Who offers the smallest? Has your credit score improved enough to qualify for this better rate? Does this lender have better terms?

Compare all the information multiple lenders provide you and make sure that you are making a well-informed, good decision with your money.

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