How to Refinance a Personal Loan

Know the ins-and-outs of refinancing personal loans to maximize your savings.

Sometimes paying back a loan can be a little challenging. And refinancing can be your only option, even if it’s a personal loan.

Many people fear having to refinance a personal loan, but it can benefit you when done correctly. One of the factors that needs to be considered before taking that step is the interest rate that will be paid.

Only move forward with the refinancing if the new interest rate you’re being given is lower than the one you had initially.

If the interest rate is higher, you will spend more than you could have spent on the first loan leaving you with more losses.

Another factor you need to consider is your credit score since it is directly connected to the interest rates you’ll be given.

If you have been paying off the first loan properly and have a good score starting at 690, then you are a great candidate for refinancing.

Confirm your credit score and use it to negotiate for a better loan deal-the amount of money you’ll have to pay back also matters and should not be ignored.

The above factors can help you figure out when it’s a good idea to refinance personal loans, but you also need to know the proper steps to follow when looking for the loans.

How to Refinance Personal Loans

1. Pre-qualification

This is the longest and hardest step, but you cannot ignore it because it determines whether you get the loan. The lender will evaluate your ability to pay back the loan to decide whether or not they should approve or deny it.

The lender usually verifies all your information, including your credit score, but even if you pass all the requirements, they may still reject your request.

You’ll be required to fill out a pre-qualification form, after which your credit history will be assessed.

The lender will determine the risk level they are taking by lending you the money and may decide to deny your request if your score is too low or your history isn’t good. If your request is granted, you will get notification about the loan, including the amount of the loan, terms of payment, and interest rates. 

Once you get the offer, you can choose to accept or deny it.

If you accept, you can proceed to apply for the loan, after which you will be asked to provide some additional information for verification purposes.

2. Refinancing Costs

The amount of money you’ll spend on the new loan should not be more than what you were spending on your old loan. 

Therefore, your second step is to compare the refinancing costs and the long-term benefits you’ll get from the new loan.

To determine whether you’ll benefit from the new loan;

Start by knowing the total amount of loan you can get by adding your loan balance, the annual percentage rate, and the loan term.

Calculate the new rate and add it to the total amount you owe then compare the number you get with the number you had initially.

3. Repaying the Old Loan

Your third step is to pay the old loan using the new loan. Your lender may transfer the loan directly to your former lender or send it to you.

Make sure you pay back all the former loan so you can pay attention to the new loan.

After transferring the funds, you have to confirm whether the old loan has been closed or not.

Failure to confirm this step could land you in more trouble since any remaining loans will accumulate more fees for you. Make sure your account has zero balance.

4. Repay the New Loan

Your trouble doesn’t end when you pay off the first loan. You have to start making payments towards the new loan as soon as possible to avoid accumulating debts.

You can set up your checking account to make the same amounts of payments at regular intervals.

Advantages of Refinancing Your Personal Loan

A lower interest rate is one of the main reasons why refinancing a personal loan is essential to consumers. But that usually only happens when you have a good credit score and credit history.

Another benefit is reduced payment terms, which can also help you save more money in the long term. The faster you can pay your loan, the less interest you’ll have to pay, and the more you’ll end up saving.

There are also several disadvantages that you must consider before deciding to refinance personal loan.

One of the cons is that you could end up paying more interest rates through the longer payment term you’re given.

The longer you end up paying your debt, the more money you’ll spend, thereby running a loss. Another disadvantage is that you could end up paying origination fees, which can add to your overall costs.

Some lenders charge an additional 0% to 8% rates to give out refinance loans.

You could also end up with prepayment penalties, which will not work in your favor.

When to Refinance a Personal Loan

Most of the time, refinancing makes sense because it extends your repayment duration, which means you can make smaller payments, but some lenders may not easier for you.

You should make sure that your monthly payment can be lower than your initial payments to increase your cash flow and help you pay back other loans you may have.

In case a longer repayment duration isn’t possible, make sure you can pay back the loan within a short time to reduce the interest rate and still allow you to make profits.

You can also try to negotiate for better repayment terms when you intend to pay the loan within a shorter period. Another reason to refinance personal loan is the kind of interest rate you have.

If the current loan charges you a fixed rate and the initial one charges varied rates, you should go ahead with the plan. Fixed rates will be more convenient because you will have to make consistent monthly payments.

Conclusion

With all these, you should be able to make an informed decision on whether to refinance personal loan or not.

The experience differs from every person, so don’t base your choices on the experience someone else had.

Weigh your financial situation and make sure you can pay back the new loan without incurring more charges.

Look for a good lender who will not take advantage of your situation by charging you higher APR.

DISCLAIMER:
The content provided on this site is for informational purposes only. You should consult a financial adviser or lawyer before making any financial decision. This site receives compensation from third party advertisers. This helps keep the site free of charge and allows us to give you reviews of companies and products you may be interested in.

Copyright © 2020 All rights reserved.