If you currently have a personal loan on the books but are looking to lower your rate or change the loan term, a refinance might be an option to consider.
With a personal loan refinance, you take out a new loan and use the funds to pay off your current loan. Depending on the terms of the refinance, you may be able to reduce your monthly payments and interest rate. You may even get yourself out of debt sooner.
Let’s go into a little more detail about refinancing a personal loan to help you determine if it’s right for you.
What Does It Mean To Refinance Your Personal Loan?
Refinancing a personal loan means taking out a new loan to repay an existing one. Once your existing personal loan account has been repaid and closed, you’ll start making loan payments towards your new loan, with a new interest rate and loan terms.
When refinancing, you can choose to apply with the same lender or a different one.
When Should You Refinance Your Personal Loan?
Refinancing can mean tons of money saved in interest, more affordable monthly payments, or being debt-free more quickly. But it doesn’t always make financial sense. Consider refinancing your personal loan if one or more of the following applies to you:
You Have Better Credit
One of the biggest reasons why consumers refinance their loans is to get a lower interest rate. Doing so can both reduce monthly payments and cut down on overall interest charges over the loan term.
If your credit score has improved since you originally took out your personal loan, you may be able to qualify for a lower rate by refinancing your personal loan.
Your Income Has Increased
If you’re earning more money these days, you may have more cash available to make bigger loan payments. If so, refinancing to shorten the loan term can help you pay off your debt a lot earlier. Not only will you be left with one less bill to pay, but you can also slash the amount paid in interest by making higher loan payments, making the loan less expensive overall.
You Want To Lower Your Payments
If your current finances are making it difficult to comfortably cover your monthly loan payments, you may want to refinance to lower your payments. You might be able to refinance your loan to extend the loan term. Longer loan terms mean lower monthly payments, which can ease a bit of financial pressure off your wallet. Moreover, you’ll have a lot more time to repay what you owe.
How To Refinance A Personal Loan
If you want to refinance your personal loan, follow the steps below:
Step 1. Gather And Compare Options
Avoid taking the first offer you get, especially if your credit score is better than when you originally applied for the loan, to ensure that you get the best possible offer. Comparing multiple loan refinancing offers will help you identify which loan best meets your needs and offers the best savings. When comparing your options, make sure to consider loan rates, loan terms, and applicable fees.
Step 2. Negotiation Tips
Lenders usually don’t give their best offer upfront. Once you’ve narrowed down your options, take the opportunity to negotiate with lenders to get an even better deal than what you were initially offered. Determine what you want from the lender, such as a lower interest rate, and offer something in return. Below are things you can offer the lender as a negotiation tactic.
- Use an offer from another lender to gain a competitive offer
- Provide collateral
- Show how your finances have improved
Step 3. Determine The Personal Loan Refinancing Costs
There will likely be applicable fees related to your refinance, such as origination fees or early repayment fees. Read the fine print of your existing loan to determine what it will be. Once you have a final figure, determine if the cost is worth the savings you’d get from refinancing.
It is possible to increase the amount of money you want to borrow for refinancing in order to cover these fees. Although, you should still ensure that the cost is worth your while so you aren’t taking on more debt for no reason.
4. Apply For The New Loan
If the cost of refinancing is worthwhile, it’s time to actually apply. Before submitting your application, be sure to check the eligibility criteria for the new loan. To apply you’ll generally need to provide information and supporting documents regarding your identity, income, and employment.
5. Pay The Old Loan Off With The New Money
Once you get approved for the new loan, use the new money to pay off your existing loan. Generally, lenders will transfer the new money directly into your bank account, it is your responsibility to transfer the funds to the existing loan to close it.
6. Verify Old Loan Is Closed
After the funds have been transferred to your old loan account, contact your old lender to ensure that it has been closed and the balance is zero. Once this has been done, you will have officially refinanced your loan.
Borrow Up To $50,000
Advantages Of Refinancing A Personal Loan
Refinancing comes with some significant benefits, including the potential to save money or make your payments more affordable. Here are a few key perks to refinancing a personal loan:
- Lower interest rate. If your credit score has increased since you took out your loan, you may be able to qualify for a lower interest rate on a refinance. This can help you save thousands of dollars over the life of the loan.
- Pay the loan off faster. If your goal is to pay off your loan as soon as possible, you can shorten the loan term with a refinance. While your monthly payments may be higher, you can be debt-free sooner and save a ton in interest payments.
- Extended loan terms. If you want to reduce your monthly payments, you can refinance your personal loan with a longer term. This will give you more time to repay the balance, which means lower monthly payments.
- Payment stability. If you currently have a variable-rate loan, you can refinance to a fixed-rate loan for more payment stability and predictability.
Disadvantages Of Refinancing A Personal Loan
Along with the benefits of refinancing a personal loan comes a few drawbacks. Be sure to consider these before applying:
- Additional fees. When you apply for a new loan, the lender may charge added fees such as loan origination fees. You’ll need to crunch the numbers and account for these extra fees to make sure refinancing your personal loan makes financial sense.
- Early prepayment penalties. Some lenders charge a fee for early loan repayment. Find out if you’ll be charged this penalty fee for paying off your existing loan early, and if so, find out what the exact charge will be. Again, you’ll want to do some calculations to verify whether or not all these additional fees will cut into any potential savings from a refinance.
- More paid in interest. If you refinance to extend the loan term, you could be paying more in interest overall.
- Impact on your credit score. Since refinancing involves taking out a new loan, the lender will conduct a “hard” credit check, which may have an impact on your credit score. Moreover, opening and closing new accounts can affect your credit history length which can also impact your score.
- May not be worth it if you’re close to paying off the loan. If your current personal loan term is already nearing the end, refinancing likely won’t be worth it. You’d be better off sticking it out to pay off the current loan instead of refinancing.
Is It Costly To Refinance A Personal Loan?
It can be costly to refinance a personal loan, but it depends on the specifics of the loan you have and want to apply for. There are often fees associated with cancelling and opening a new loan, which could cost you hundreds of dollars.
To determine how much it’ll cost you, you need to read all of the documents of the existing loan and new loan to figure out how much you should expect to pay.
Reasons You Shouldn’t Refinance Your Personal Loan
In some situations, a refinance might not be the right option. Here are some scenarios in which you shouldn’t refinance your personal loan:
Your Loan Is Almost Fully Repaid
If you’ve paid off most of your personal loan, refinancing won’t make much sense. You’ll be paying more in fees and possible early repayment penalties, which could offset any savings you might benefit from. Instead, focus on paying off whatever balance you have left.
You Can’t Get A Lower Interest Rate
Getting a lower rate is one of the most common reasons to refinance. If rates are really high right now or your credit hasn’t improved enough to help you secure a lower rate, refinancing might not be a good idea.
Alternatives To Refinancing A Personal Loan
If you want to reduce your interest rate, refinancing may be a good option. But there is another alternative to refinancing that may afford you with a lower interest rate: a credit card balance transfer.
If you already have a balance transfer credit card in your wallet, you may be able to transfer the outstanding balance from your personal loan. This works best if the rate on your credit card is lower than the rate you’re currently paying on your personal loan.
If you don’t have one of these credit cards handy, consider applying for one. Look for a card that offers a 0% or low interest rate for an introductory period. The longer this promotional period, the more time you have to pay off your balance without interest. This type of offer is usually reserved for those with excellent credit.
Just keep in mind that these cards often come with a balance transfer fee of anywhere from 3% to 5% of the transferred balance.
Does Refinancing Make Sense For You?
Refinancing can be a great option for some, but a waste of effort for others, it depends entirely on the individual’s unique financial position. Before jumping into a refinancing deal, make sure that you consider your specific financial goals and situation. If you need assistance with refinancing, Loans Canada can help you today.
