Refinancing a personal loan is possible and encouraged, for people who may need lower payments, want to pay off the loan faster, or have improved their debt-to-income ratio or credit score.
The rest of this article will explain refinancing a personal loan, what to consider, and when to do it.
When you refinance a personal loan, you pay your existing personal loan off with another loan. When doing this, your new personal loan should have a lower rate. Refinancing should save you money over time unless you have also extended the term.
When you refinance a loan, it does not have to be through your existing lender. Instead, you can find a different one with a lower interest rate and use the loan provided to pay off your old loan. After this, you will be able to start making payments to the new one with the agreed-upon interest rate and terms.
There are several reasons you would want to do this, and it may be the best decision you make depending on your circumstances. So, when should you refinance your loan?
If you have seen a change in your credit score, hopefully for the better, you should think about refinancing your loan. A borrower with good or excellent credit (this is considered to be a FICO score of about 690 or higher) will be eligible for lower personal loan rates.
This means that if you have made your previous loan payments on time, and your credit history has grown as well as your credit score, you could very well be eligible for a better deal on a new loan, which could save you money in the long run.
Another thing that is likely to qualify you for a better deal on a loan is if you have paid off previous debts. 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.
When you refinance a loan, it will extend your repayment term. This will lower your monthly payment, which in turn will help you when it comes to budgeting your money. This is also beneficial to you because if you have high debt, you can use this extra money to pay it down, which in turn will help you become eligible for better deals in the future.
This can also be the case if your income has decreased, and you find yourself unable to afford your other payment. Say you lost your job, or your combined income in the household has been reduced. If this is the case, you may want to look into refinancing your loan for a longer repayment term.
This will probably not save you money in the long run, but it will help reduce the monthly payment, and it will help you not get into more trouble by missing payments and lowering your credit score, which would do far more damage in the long run than extending your repayment term.
If you find yourself in a place to pay off your loans in a faster period of time and can afford the higher monthly payments, you could refinance your loan to get a shorter loan term. This will save you money since it will reduce your total interest cost, and therefore clear your debt faster.
If you happen to have a variable APR, it could make things difficult to plan payments, and you may also see an upwards trend that will end up costing you way more in the end. If you choose to refinance, you may be able to change this variable to a fixed rate.
This will allow you to enjoy a consistent payment schedule each month and will leave you feeling less stressed.
Depending on which personal loan you acquire, there is a chance that it comes with a balloon payment. This would require you to make a larger payment than your normal monthly amount at the end of the repayment period. If you refinance your loan before this, you can avoid this happening altogether.
When refinancing a loan, one of the most important questions you must ask yourself is… can you afford the fees to do so? Most times, refinancing can save you money but will require you to pay certain fees in the beginning.
These will include origination fees, application fees, and possible prepayment fees if your lender charges you for paying off the previous loan before your repayment period ends.
Knowing that you can afford these fees before applying for refinancing is incredibly important because if you cannot, it could defeat the purpose of applying for it in the first place.
If you decide you want to refinance your loan, here are some steps you should take to do so.
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.
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.
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.
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.
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.
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.
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.
Although refinancing has tons of benefits, it may not be for you, and that’s okay! Some drawbacks may include:
As mentioned, any time you apply for a personal loan, you will likely see a temporary dip in your credit score. This is also true for refinancing. This small dip should not have any long-term effect on your credit score as long as you are making the full monthly payments on time.
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.
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.