Refinancing a Personal Loan: What You Need to Know
Refinancing your personal loan is a great way to save money and consolidate debt. This essentially means that you are taking out a new loan with better terms than your current one, often with lower interest rates and longer repayment periods. Refinancing is most commonly used to consolidate high-interest credit card debt or student loans into one low-interest personal loan, which could save you hundreds of dollars in interest payments over time. While this may now seem like a perfect solution for all your financial problems, keep reading to learn everything you must know before making a decision.
So, now that we covered what is refinancing a personal loan, we should mention that it’s a great opportunity that can save you money and give you more options for repaying your debt. After we answered can you refinance a personal loan, let’s take a look at some factors to keep in mind here:
- You should check your credit score beforehand. You’ll need excellent credit to get a good refinancing deal, and it’s worth checking it before applying. A high score could mean you qualify for a lower interest rate or even no interest at all on your new loan.
- Don’t forget to compare rates. Comparing rates from different lenders before deciding which one to choose is the best policy for ensuring you are getting a good deal.
- Get pre-approved for a refinancing. Before you apply for refinancing, make sure you have pre-approved financing from at least one lender. This will speed up the process and allow you to compare rates more easily.
- Have realistic expectations about refinancing your loan. Refinancing is not always easy or affordable, so don’t get too excited until the process is complete. Keep in mind that refinances can take several weeks or even months to complete, so don’t rush into anything.
What Does Refinancing a Personal Loan Mean?
Refinancing a personal loan is changing the lender of your existing debt. You can do this for any reason, and it’s usually done to get a better rate or terms.
For example, you might refinance your student loans to get lower monthly payments by extending the term of repayment. Or perhaps you have an adjustable-rate mortgage (ARM) that has seen its interest rate rise in recent years—refinancing it would allow you to lock in at a lower rate now.
Benefits and Drawbacks of Refinancing a Personal Loan
Refinancing a personal loan is a great way to save money and improve your borrowing power. However, there are a few things to keep in mind before you actually do anything. We will now take a look at both benefits of refinancing a personal loan as well as some of the most common drawbacks of refinancing a personal loan so you can make a well-informed decision.
- Lower interest rates. The interest rate you pay on your refinanced personal loan will be much lower than the credit cards you may have used to finance expensive purchases or personal loans you took out in the past.
- You will save money on your loan by refinancing into one with a lower interest rate.
- You will have lower monthly payments. You’ll be able to make one payment instead of several small ones for each of your debts. This will result in a significant decrease in your monthly expenses because there’s only one remaining bill to pay.
- It will clear your credit history. Paying off old debts can help clear up your credit report and raise your credit score over time as well as give you more financial freedom in terms of getting new lines of credit or buying things like houses or cars (which often require good-to-excellent scores).
- It will also improve your borrowing power, allowing you to borrow more money for the same amount of interest.
- This whole process usually takes less time to complete than applying for a new loan, as lenders are already familiar with your financial history and credit score. This can save you precious time and energy in your search for a new loan or financial solution.
- More flexible terms. Many refinancing options allow borrowers to extend the duration of their loan or adjust the payment schedule in order to better suit their individual needs and budget. This gives borrowers more flexibility and control over their finances, which can be very important during difficult times.
- You may have to pay fees and taxes when refinancing your personal loan.
- You may be competing with other borrowers and find it difficult to get a new lender who is willing or able to give you a new loan.
- The interest rate on your new loan may not be lower than the one on your existing one, so refinancing will not save money by itself.
- A new lender could have different terms and conditions than the original lender. They might require additional collateral or set stricter repayment schedules.
We recommend going through as many steps as possible before deciding whether or not refinancing is right for you based on how much money can potentially be saved over time through lowered monthly payments versus what will cost upfront fees associated with applying again altogether.
How to Refinance a Personal Loan
And now, let’s answer the question: how does refinancing a personal loan work? If you have a good credit score and want to take advantage of a low-interest rate, here’s how to do it:
- Shop around for the best rates. Compare rates from different lenders, and don’t forget to factor in fees and APR.
- Read the terms of the loan agreement carefully. Make sure that all the important details are spelled out, such as the amount of the loan, interest rate, and other fees.
- Get pre-approved for a refinancing. This will let you know what rate you’re likely to get if you go ahead with the refinancing.
- Fill out the loan application and submit it with the required documents.
- Agree to the terms of the refinancing, and await approval from your lender.
- Sign the new loan agreement and make payment as stated in the contract.
Does Refinancing a Personal Loan Hurt Your Credit?
Most people wonder- what happens when you refinance a personal loan? Does it hurt your credit?
The simplest answer to this is yes, refinancing a personal loan can hurt your credit score.
No matter what your score is, if you refinance a loan but then fail to make your payments on time, it will decrease significantly. However, there are steps you can take to minimize the impact of refinancing on your credit score. First, make sure you have a good credit history. Second, research your available options and compare them to your current loan. Third, speak to a credit counselor about your options if you feel like your credit score may be impacted by refinancing. Fourth, always fully disclose all of your information when applying for a personal loan, and keep track of any updates to your credit score so you can make informed decisions about future loans.
When to Refinance a Personal Loan?
If you are considering refinancing a personal loan, it is important to understand the reasons why, and have a clear plan for how you will use the funds. In case your credit score has improved and you wouldn’t mind some cash flow refinancing can be a great choice. Also, don’t forget to talk to your lender as many of them offer low-interest refinancing options that can save you money in exchange for paying your loan for a longer time. Do your research and shop around for new rates. You may be able to find lower interest rates or better terms from alternative lenders than those offered by traditional banks or credit unions. It could also be a great idea to refinance if you have multiple debts that could be fitted into one single payment each month.
This can also help in giving you peace of mind knowing all accounts are being paid off sooner rather than later which gives you more control over finances instead of wasting time worrying about money too often.
We hope this article helped you understand what does refinancing a personal loan means. If you are considering going through this process yourself, we suggest you do thorough research and talk to a few lenders and financial advisors to get the most accurate information on the question is refinancing a personal loan worth it, according to your personal situation.