Borrowing money through a personal loan is a common practice for many people. Whether you need money for debt consolidation, a major home upgrade, or a once-in-a-lifetime vacation, a personal loan can help.
It’s not uncommon for personal loans to have terms of five years or more. In that period, a lot can happen, and you may find that you wish to refinance your personal loan to alter the loan’s term to accommodate those changes.
Getting a Personal Loan Refinanced
Here are the seven things you need to do to successfully refinance your personal loan:
1. Perform the Math
Checking the figures and deciding if it makes financial sense to refinance a personal loan is the first step.
Determine why you want to refinance:
- Lessening of the Regular Monthly Payment. In order to minimize your monthly payment, you can extend the length of your loan, but doing so will increase the total cost of your borrowing. Keeping the period the same while negotiating a lower interest rate can also help reduce the payment required each month.
- The Total Expense is Reduced. In most cases, you can save money on interest by either reducing the loan’s term or the interest rate.
- Benefits Quicker. By refinancing, you can reduce the length of your loan and so reduce the total interest you pay.
- Refinance from an ARM to a fixed-rate loan. Loan payments on adjustable-rate mortgages fluctuate with market interest rates, adding an element of uncertainty to their use. The repayment schedule of a fixed-rate loan may be more reliably predicted, which is why many people choose to refinance into one.
The next step is to review the terms of your current loan and do some basic math. Make sure you know the terms of your loan and if there is a penalty for paying it off early. If that’s the case, the price of the refinancing will go up.
Finally, take a look at the remaining balance on your loan and your current payment. Getting a lower monthly payment or a loan with cheaper interest throughout the life of the loan are two ways to save money through refinancing.
2. Verify your credit rating
If you’ve done the math and think refinancing could be beneficial, the next step is to review your credit report. There are many services out there that will allow you to check your credit score for free.
Checking one’s credit record is a prudent step to take before making an application for any kind of loan. You should at least look it over for mistakes that could lower your score and make it more difficult to get a loan at a good interest rate.
You can use the information in your credit report to work on raising your credit score if you have some time before you need to refinance. For instance, if you know that your score is suffering because of your debit or credit card utilization, you can utilize this time to reduce those factors.
3. Get Preapproval
You should compare rates and terms from multiple lenders before committing to a debt consolidation loan, mortgage, or personal loan. Prequalification is the initial step in the shopping process. Locate a number of loan providers who have competitive rates and terms, and prequalify with them.
The lending institution will verify your qualifications for a new loan during this time. You’ll need to give us some information about your personal finances.
You can compare loan offers by using the lender’s preapproval, which includes estimated rates and fees. There’s no risk in shopping around for a cheaper rate or conditions by being prequalified with different lenders.
4. Check Offers
Now that you’ve been prequalified by several different lenders, you can begin comparing their loan offers.
What you should keep an eye out for are the following indicators:
- The Rate of Interest. Interest payments on a loan will be reduced if its annual percentage rate is low. This results in a reduced interest rate and a lower monthly payment.
- Time Period of the Loan. The total cost of a loan will be higher if it has a longer payback term, but the monthly payment will be cheaper. It’s a plus if the monthly payment is reduced when refinancing a personal loan. Alternatively, if you’re looking to save more money in the long run, a shorter term will have a higher monthly cost but less time for interest to accrue, which will result in lower total interest paid.
- Fees. Many lenders add additional expenses to their personal loans, including origination fees, loan application fees, and early repayment fees. A lower interest rate and lower total cost of your loan are possible when you reduce or eliminate expenses.
- Notable Factors. With autopay from a bank account or other incentives for banking customers who simultaneously receive a loan, several lenders offer attractive deals and promotions. Keep these in mind when you search for a loan.
5. Pick a Lender and Apply
Making an application for a loan is the next step once you’ve researched the market and determined which loan best suits your needs. Choose a loan term and loan amount equal to the amount you’ll need to pay off your current loan.
The process of applying for a loan is similar to that of getting preapproved, though a more thorough credit check will be performed.
In order to verify your identity and the accuracy of the information you supplied during the preapproval process, the lender may ask for documentation. Get your pay stubs and other financial documents ready, such as bank and loan statements.
6. Repay the Original Loan
Your current loan will be repaid whenever you get the funds from your new personal loan. Get in touch with your current loan servicer to discuss the best method for paying off your personal loan.
Paying off your existing loan with the proceeds from your new personal loan concludes the refinancing procedure.
7. Begin paying back the new loan.
Your remaining financial obligation will be the new loan you took out to pay off the old one. Your new lender will continue to send you monthly bills as the old one did. Get started making payments on your new loan in the same manner as you did on your old one. As time goes on, you’ll reduce your loan balance and eventually pay off your new loan.
Is a Personal Loan Refinance Right for You?
When weighing the pros and downsides of refinancing a personal loan, it’s important to look at the situation objectively.
The Advantages of Personal Loan Refinancing
There are many advantages to refinancing your personal loan if you have the option. Generally, the benefits are about saving money, either overall or on a monthly basis.
- Cut down on your regular payment. If you can negotiate a lower interest rate or a longer repayment period on your loan, you can minimize your monthly payment and free up additional cash flow.
- Spend less money over time. The interest you pay on a loan can be lowered by refinancing to a shorter loan term or a cheaper interest rate.
- Put Several Loans Into One. If you have more than one personal loan, you can refinance all of them into a single loan. Consolidating a number of bills into a single installment is a huge time saver.
- Alter the Interest Rate on Your Loan. Refinancing implies changing your present loan’s interest rate with a new one. If you have improved your credit since you took out your prior loan, refinancing can typically mean cutting the rate. Alternately, you might go from a variable to a fixed interest rate.
The Disadvantages of Personal Loan Refinancing
Remember that refinancing isn’t a cure-all, and weigh the costs carefully before making a final decision.
There is always the risk that you will pay more after refinancing:
- Spending all around is higher. By extending the loan’s term, borrowers can cut their monthly payments but end up paying more in interest throughout the life of the loan.
- Cash Payments Made Initially. There may be initial fees associated with refinancing that make the process expensive. You will have to pay the origination fees of the new lender in addition to any prepayment penalties levied by your present lender.
- Arise in Interest Fees. Refinancing to a loan with a higher interest rate is possible if your FICO score has declined since you acquired your initial loan or if interest rates on personal loans have risen generally. Because of this, the total interest you pay on your loan will increase, which means you will end up paying more in the end.
Alternatives to Personal Loan Refinancing
Refinancing isn’t the only way to make changes to your personal loan. To begin the refinancing process, contact your existing lender, especially if you are having trouble making the monthly minimum payment. It’s possible to haggle with your loan servicer for a cheaper interest rate or additional time to pay.
Alternatively, you might use a debt transfer credit card to pay off your loan. These credit cards often have an initial period of 0% APR on balance transfers and purchases lasting anywhere from 12 to 18 months. However, the price to transfer a balance is typically charged immediately.
If you can pay off your loan within a year, a 0% interest balance transfer credit card may be a better option than refinancing your personal loan. Pay off the loan in full before the special rate ends, or you’ll be stuck paying much higher interest rates on a credit card.