When And How To Refinance A Personal Loan | Bankrate

A personal lend refinance lets you replace your existing loanword with a fresh loan that potentially has a new interest rate or revised refund timeline. Refinancing might be a thoroughly option if matter to rates have dropped or are lower than your current rate, or if you need to extend your refund term. Securing a lower matter to rate through a refinance reduces your cost of borrowing indeed you ’ ll pay less on your personal lend overall. Refinancing to a longer lend term offers lower minimum monthly payments. You will likely pay more toward the loan overall by extending the refund timeline due to interest charges .

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What does it mean to refinance a personal loan?

When refinancing a personal lend, you ’ ll enforce for a new loanword — either with the same lender or a different one — and then use the funds you receive to pay off your honest-to-god lend. Once the process is complete, you ’ ll make payments on your new lend with a new interest rate and terms. You might want to refinance a lend for any numeral of reasons, but ideally, it would be to obtain a new, better sake pace as part of the process. “ normally the goal is reducing your requital or lowering your interest rate. The raw loanword may besides be for a greater sum if the goal is to get more money for a new need, ” says Vida Awumey, erstwhile frailty president and director of policy research for OneMain Financial .

When does refinancing a personal loan make sense?

Refinancing your lend about constantly makes feel if it will save you money. There are many scenarios in which it may be possible to achieve significant savings. “ For exercise, if concern rates drop and you are able to get a lower interest rate, you would want to consider refinance, ” says Adam Marlowe, principal grocery store development officer for Georgia ’ s Own Credit Union. hera are some other times when it may make sense :

  • You have a better credit score. One of the best ways to qualify for a lower interest rate on your personal loan is by improving your credit score. If your score has increased since you initially took out your loan, this could be a good reason to refinance.
  • You want to switch your rate type. Having a variable APR on a personal loan makes it difficult to plan for your monthly payments. Not only that, you might see an upward trend that ends up costing you more. By refinancing, you can switch from a variable to a fixed rate so you can enjoy consistent payment amounts each month.
  • You want to avoid a balloon payment. Some personal loans may come with a balloon payment, requiring you to make a much larger payment than the normal monthly amount at the end of your repayment period. You can refinance ahead of time to avoid this style of personal loan.
  • Your income decreased and you need lower monthly payments. If you’ve lost your job or have reduced income, you may be looking to lower your monthly loan payment. In this case, you may want to refinance your current loan for a longer repayment term, which may not save you money in the long run but could help reduce the monthly payment.
  • You’d like to pay your loan off faster. If you can afford larger monthly payments, you may want to refinance into a shorter loan term. Paying your loan off in a shorter amount of time will save you money in interest overall.
  • You can afford the fees. Taking out a refinance loan may incur fees, such as origination fees or application fees. Your current lender may also charge a prepayment fee if you pay your loan off before the repayment period ends. Before applying for a refinance loan, ensure that refinancing still makes sense financially after factoring in fees.

When does refinancing a personal loan not make sense? A personal loan will not be worth all the prison term and campaign involved in some cases. here are some of the times when refinancing may not be the best travel :

  • When your loan balance is minimal: If you don’t owe that much on your existing loan, it may not make sense to refinance as some loans charge origination fees on top of the loan balance. Instead of incurring more fees, work on paying off the balance or your original loan more quickly.
  • When your interest rate would be higher: If you’re not getting a more favorable interest rate by refinancing your loan, think carefully about whether you should proceed. This may only make sense if you can’t afford the payments and need to extend the repayment timeline in order to lower the payments.
  • Your repayment timeline is almost over: If you’re reaching the end of the repayment timeline on your existing loan, refinancing will extend the loan’s duration. This means you will pay more money overall on interest charges.

How to refinance a personal loan

If you are quick to refinance your loanword, get down with the play along steps .

1. Figure out how much money you need

When you refinance a loan, you ’ re basically paying off the existing loan with a new one that has unlike terms. so, before you shop for quotes, determine the accurate amount of money required to pay off your current loan. besides, see if your master lender charges prepayment penalties that might outweigh the benefits of refinance. Knowing your claim loanword wages measure is important because you ’ ll need to know the loanword refinance come that ’ randomness needed to be free-and-clear of your original loan. Take action: Log into your personal loanword account or call your lender to obtain your great payout balance, and to learn about prepayment fees.  

2. Check your credit score and credit report

Before you consider refinancing your lend, you ’ ll indigence to check your credit rating score and credit report. This is a necessity mistreat to gauge whether you qualify for a lower rate than what you ’ re presently paying. If the new interest rate isn ’ thymine importantly lower, it may not be worth it to refinance. “ Most lenders will quote their best rate, but if you don ’ t have A-plus credit, that may not be the rate you qualify for, ” Marlowe says. “ To get your credit score, check to see if your accredit tease issuer or fiscal initiation provides this for free to their customers. ” You can besides request a free credit report per annum from each of the three accredit agency — Equifax, Experian and TransUnion ( though weekly reports are free until April 20, 2022 ). As you ’ ra shopping around for a new loan, determine whether lenders do a balmy wrench or hard pull of your credit score when giving you a quote. A unvoiced credit score will negatively affect your score, at least in the short-change term, so you ’ ll want to get quotes from lenders that show you your rates using entirely a cushy pull. This process is known as prequalification. Take action: Request a free credit report through Equifax, Experian or TransUnion.

3. Shop for rates and terms at banks and online lenders

research is key in refinancing personal loans ; before refinance, compare rates and terms from multiple lenders. Shopping approximately is important, because the interest rate and terms you ’ re offered can differ between lenders. besides, a new loanword with a lower interest rate isn ’ deoxythymidine monophosphate necessarily good if you ’ re paying more for it overall in fees or by extending it unnecessarily. “ Refinancing a lend may cost extra fees and will change the terms of the loanword, ” says Jeff Wood, CPA and partner at Lift Financial. “ Your current lend may have a prepayment penalty in order to replace it. All of these factors must be considered to determine if a refinance makes smell, both personally and financially. ” If you ’ re not looking for lower monthly payments, it may besides be unwise to extend the maturity of your new loanword past the maturity of the stream loan. even if you get a lower interest rate, you could end up paying more in interest over a longer fourth dimension skeletal system. Take action: Compare the features of at least three personal loanword refinance offers. To see the overall costs of each loanword, try using a personal loanword calculator .

4. Speak with your current lender

Don ’ t overlook your stream lender during the inquiry process. It may be will to offer you a better consider than your existing loanword to keep your business. “ You already have an established relationship with that party, ” Awumey says. “ Your lender will assess your needs and determine your eligibility for a new lend. many lenders will let you see if you are prequalified for a loanword without making a citation question. ” Take action: Contact your existing lender to let them know that you ’ re considering a personal loan refinance. Ask them whether you ’ five hundred qualify and the revised rate and terms it ’ south will to offer .

5. Apply for the loan

When you ’ ve settled on a lender whose offer you like best, submit your application and provide any want verification — this could include your Social Security number, paystubs, bank statements or tax documents. Remember, the loan comparison step discussed earlier international relations and security network ’ t the lapp as a formal refinance application. To officially move fore with a loan offer, undergo the lend cover process, and receive funding from your choose lender, you ’ ll need to submit a formal application. Take action: Read through the fine print of the loanword before accepting it, taking note of your payment agenda and any fees, including prepayment penalties. If you ’ re satisfy with the terms of the loanword, you can accept it and will typically receive funds within a few days .

6. Begin making payments on your new loan

once you receive funds from your new loanword, you ’ ll use them to pay off your existing lend. This should be done vitamin a soon as possible to avoid accruing unnecessary interest or making doubly loan payments. Receiving your lend funds besides enters you into the refund period of your raw loanword. You ’ ll begin making monthly payments immediately with your raw interest rate, new refund timeline and new monthly payment amount. Making on-time, monthly payments keeps your account in good stand. Take action: Set up auto-pay for your newly refinance loanword so you never miss a payment .

How refinancing a personal loan affects your credit score

When you refinance, you ’ ll be subjugate to a credit check. This can lower your credit score slenderly, but the drop should be impermanent — particularly if you practice good fiscal habits with your modern loan. “ Credit inquiries and modern accounts can negatively affect your citation score in the light term, but making on-time payments on a new lend will help your credit score over the long term, ” Awumey says. Keep in mind that a little score could hurt if you ’ re besides looking to buy a new car or move into a fresh apartment. car dealers and landlords check your credit score, and refinancing your loan at the wrong time could make it more unmanageable to find a vehicle or caparison .

Advantages of refinancing a personal loan

While the advantages of refinancing your personal loan will depend on your goals, they can by and large include everything from getting a lower interest rate to reducing the overall cost of your loan .

  • Better interest rate: If rates have dropped or you have improved your credit score, you could be able to save money on interest.
  • Faster loan payoff: If you’re comfortable making higher monthly payments and you want to get out of debt faster, you can refinance a personal loan to a shorter term. This has the added benefit of reducing the amount of interest you’ll pay overall.
  • Extended repayment periods: Extending your loan repayment can help your payments feel more manageable if you’re having difficulty making them on time, since lengthening the terms will reduce your monthly bill.
  • Payment stability: Refinancing can provide payment stability if you’re switching from a variable rate to a fixed rate.

Disadvantages of refinancing a personal loan

Refinancing is not the best option for everyone. Before committing to a refinance, consider the come drawbacks :

  • Extra fees: Anytime you take out a new loan, you might have to pay additional lender fees, which can cut into the money-saving benefits you may be trying to achieve.
  • Prepayment penalties: Some loans come with a prepayment penalty when you pay the balance off before the term ends. Since refinancing requires that you pay off the existing loan and replace it with another, it’s best to check the terms of your current loan to determine whether you’ll be penalized for paying it off early.
  • Potentially higher interest costs: Extending a loan period usually results in more interest costs over time. If you’re trying to lower your monthly payment because of financial difficulties, you might still consider refinancing. Just understand that the lower monthly payment likely won’t save you money in the long run.
  • Credit score impacts: Because refinancing counts as a new loan inquiry, it can lower your credit score, even if the impact is minimal and temporary.
  • Research and application time: It takes time to research lenders, compare quotes and send in applications. If your loan is close to being paid off, refinancing may not be worth the hassle.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

Get Started

The bottom line

If you ’ re looking to refinance a personal loan, it ’ south important to make sure it is a fresh motion financially. Answer these questions first : Will you get a lower interest rate ? A lower monthly payment ? Better terms ? Remember there are pros and cons to refinancing including extra fees, prepayment penalties and potentially higher interest costs. once you ’ ve done your research and shopped around with multiple lenders, you can determine whether refinancing makes sense .

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