Refinancing a Personal Loan

Refinancing a Personal Loan

Written by Veronica Ott
Fact-checked by Caitlin Wood
Last Updated March 13, 2020

Refinancing is the process of replacing an existing loan with a new loan that has different terms and conditions. Often, the new loan has more favourable terms, which is more often than not, the reason why consumers choose to refinance their loans. In fact, refinancing can end up saving you hundreds or even thousands of dollars over the life of a loan.

Wondering if refinancing a loan will hurt your credit score? Find out here.

Why Would Someone Want to Refinance?

There are several benefits to refinancing a loan, getting a better loan term, obtaining a lower interest rate, and paying less or lower fees are three main reasons. Other reasons someone may want to refinance is to switch from a variable to a fixed interest rate or to remove a cosigner or co-applicant off their loan.

Improved Loan Term

An improved loan term is subjective because it depends on the individual’s current financial position. If you want to pay down your loan faster, you’ll want a shorter term, but your loan payments will be higher. On the other hand, if you want to have lower loan payments, a longer loan term is best, but you won’t be able to pay off your loan as quickly.

Interested in applying for a short term loan? Read this first.  

More Affordable Interest Rates

As for interest rates, most borrowers want to have a rate that is as low and predictable as possible so that their payments are as affordable as possible.

Fewer Fees, More Savings

Finally, applicable fees on a loan can be reduced or eliminated by refinancing which is ideal so you that you are paying less.

On the other hand, if your credit score has decreased, you’re behind on loan payments, you’ve lost a source of income, don’t want to change your loan rate or terms, or you’re having difficulty meeting the lender’s requirements, refinancing may not be a good option for you. If you’d like to refinance in the future, be sure to work on your finances to improve them so that you will have a better chance of being accepted for a loan refinance.

Personal Loans Application Check List

How to Refinance a Personal Loan

If you want to refinance your personal loan, there is a process described below that is helpful to follow. 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.

Gather and Compare Options

The first step is to do your research on available loans out there. Try not to limit yourself to traditional big banks, consider other lenders such as small local banks, credit unions, and online lenders like Borrowell. Once you’ve sought out a few lenders and obtained some offers, compare the options you have. When comparing your options, make sure to consider loan rates, loan lengths, and applicable fees. Remember to consider your financial situation and goals in order to identify the best option for your personal needs.

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.

  • Improve your credit score
  • Obtain another source of income
  • Provide collateral
  • Use an offer from another lender to gain a competitive offer
  • Have an open discussion with employees in the lending company of interest, the higher up the employee is, the better

This page will show you how to negotiate the best mortgage contract.

Determine Refinancing Costs

There will likely be applicable fees related to your refinancing, such as origination fees or early repayment fees. Read the fine print of your existing loan to determine what they will be. Once you have a final figure, determine if the cost is worth your time, money, and energy to refinance.

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.

Planning to refinance your mortgage? Read this before you do.  

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 of the new loan. You definitely don’t want to submit a loan application only to find that you don’t qualify!

Check out our list of 20 ways to secure a loan.

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.

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.

Want to know if cancelling a credit card is bad for your credit score? Find out here.

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 one time fees to cancel or open a new loan, as well as origination and early repayment fees 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. In your analysis, be sure to consider how much you’ll save by refinancing because a one time cost may be worthwhile if you’re going to save a substantial amount of money moving forward.

Check this out to learn how you can get an online loan with affordable monthly payments.  

Since time is money, you need to consider how much time it may cost you to refinance a loan. Gathering offers from lenders and negotiating can take quite a lot of time. If you won’t be saving that much money or getting better terms by refinancing, it may not be worth your time to go through the whole refinancing process.

The money and time that it takes to refinance should all be considered relative to your current situation. Everyone’s financial position and goals are unique, what’s best for you may not be best for someone else.

Take a look at our mortgage refinancing appraisal checklist.

Refinancing vs. Debt Consolidation

Debt consolidation is the process of paying off multiple loans with one new loan. As per this definition, debt consolidation can sometimes be considered a form of refinancing, the difference between debt consolidation and refinancing lies with the nature of why people seek debt consolidation loans. Generally, people don’t use debt consolidation to obtain additional money or longer terms as they do with traditional refinancing. The goal with debt consolidation is to make an individual’s existing debt more manageable since they only have to worry about one loan instead of many.

Pros and Cons of Refinancing a Personal Loan

There are several benefits to refinancing a personal loan. Generally, the biggest benefit is a reduction in the total cost to repay the outstanding balance of your personal loan. A lower interest rate, shorter loan term, lower monthly payments and quicker loan repayment periods are additional benefits to refinancing a personal loan.

On the flip side, refinancing can have setbacks. Refinancing can result in expensive, mandatory fees to switch and being in debt longer if your loan repayment period is extended in exchange for lower payments.

Click this link to see 5 tips for refinancing your mortgage.

Does Refinancing Make Sense for You?

Refinancing can be a great option for some, but a waste of efforts 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.

Veronica is a writer who specializes in creating unique and educational personal finance content. She has extensive experience writing blog posts for companies in the financial sector. Veronica's background is in accounting as she graduated from Western University in 2017 with a degree in accounting. She is passionate about using her accounting expertise to help others with their personal finance questions and issues and enjoys using her writing to educate Canadian readers. When Veronica is not writing, she enjoys film, reading, travelling, going to the gym, and listening to music.

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