The simplest way to refinance a personal loan is by comparing lenders and then applying for a new loan with more favorable terms.
The primary factors to keep in mind are the amount you need and your credit score.
With the 2023 Household Debt and Credit Survey revealing that consumer debt for American households has surged to an unprecedented $17.1 trillion as of the second quarter, many are actively seeking effective debt management strategies. Refinancing is among the top choices.
Refinancing can offer numerous benefits:
- Lower interest rates
- More manageable monthly payments
- Quicker loan payoff
Refinancing a personal loan means replacing an existing loan with a new one, often with a different lender. The aim is to obtain better loan terms, such as a lower interest rate, longer loan duration, or reduced monthly payments.
By refinancing, borrowers can potentially save money over the life of the loan or make their monthly payments more manageable.
Lenders That Allow Refinancing
| Company | Overall Rating | Interest | Loan amount | |
|---|---|---|---|---|
recommended
| 5.99% – 35.99% | $500 – $35,000 | See offer | |
recommended
| 5.99% – 35.99% | $250 – $35,000 | See offer | |
recommended
| 8.49% – 35.99% | $1,000 – $50,000 | See offer | |
recommended
| 5.99% – 35.99% | $100 – $35,000 | See offer | |
| 11.69% – 35.99% | $1,000 – $50,000 | See offer | |
| 5.99% – 35.99% | $500 – $10,000 | See offer |
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| Company | Overall Rating | Interest | Loan amount | Get Started |
|---|---|---|---|---|
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recommended
| 5.99% – 35.99% | $500 – $35,000 | See offer | |
|
recommended
| 5.99% – 35.99% | $250 – $35,000 | See offer | |
|
recommended
| 8.49% – 35.99% | $1,000 – $50,000 | See offer | |
|
recommended
| 5.99% – 35.99% | $100 – $35,000 | See offer | |
|
| 11.69% – 35.99% | $1,000 – $50,000 | See offer | |
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| 5.99% – 35.99% | $500 – $10,000 | See offer |
How To Refinance a Personal Loan:
Steps
Determine How Much You Need
Action Step: Access your personal loan account online or directly contact your lender. Your goals here are twofold:
- Determine the exact outstanding payout balance.
- Understand any associated prepayment fees.
First, find out the exact amount left on your current loan, or loans. This will give you a clear picture of the amount of the loan you’ll need to apply for when refinancing to pay off your old loan.
Before seeking new loan offers, it’s critical to check with your current lender about any prepayment penalties. Such fees could potentially negate the benefits you’d reap from refinancing.
Know Your Credit Score
Action Step: Obtain your free credit score to determine the loan terms you’re eligible for.
Your credit score plays a pivotal role when considering refinancing. Lenders use this number to assess your creditworthiness, which in turn influences the interest rate and terms they’re willing to offer.
Before diving into the refinancing process, it’s essential to have a clear understanding of where you stand credit-wise.
Why Your Credit Score Matters:
- Better Rates: A higher credit score often qualifies you for lower interest rates. If your score has improved since you took out your original loan, you might be in a position to capitalize on this and secure more favorable terms.
- Improved Terms: Lenders are more inclined to offer flexible and appealing terms to borrowers with good or excellent credit.
- Higher Loan Amounts: With a robust credit score, lenders may be more willing to approve a larger loan amount, if required.
Annual Credit Report: By law, you’re entitled to one free credit report annually from each of the three major credit bureaus – Experian, TransUnion, and Equifax. Use this to review your credit history and ensure there are no errors or discrepancies.
Credit Monitoring Services: Several online platforms and financial institutions offer credit monitoring services, some of which provide regular updates on your credit score.
Improving Your Score: If your credit score isn’t where you’d like it to be, don’t panic. Here is a list of top lenders for bad credit.
You should also consider taking steps to enhance it before proceeding with refinancing. This can include paying down existing debts, ensuring timely payments on all accounts, and addressing any errors on your credit report.
Knowledge is power. By being informed about your credit standing, you position yourself to make choices that align best with your objectives.
💡Read More: How to apply for a loan with bad credit
Compare Lenders For The Best Rates
Action Step: Use our free loan comparison tool to find the right personal loan and take the guesswork out of doing all the legwork yourself.
Not all lenders are created equal. Every lender offers a unique package when it comes to personal loans. From traditional banks and credit unions to modern online lenders, each has its own rates, terms, and application procedures.
It’s vital to sift through the options to land on one with a competitive rate that best suits your needs. If you’re uncertain about the potential costs of a loan, our personal loan calculator can help give you a clearer picture.
Customer reviews, repayment options, and the lender’s reputation should also factor into your decision.
Consider Loan Terms and Fees
Action Step: Review and understand all terms, fees, and conditions before signing any loan documents.
Once you have found a lender you are comfortable with, be sure to read the loan documents carefully before signing it. This will help you understand the repayment terms and avoid any surprises down the road.
When thinking about refinancing, it’s crucial to look beyond just the interest rate. Dive deeper into the terms and associated costs of the new loan:
Type of Interest Rate: Does the loan come with a fixed rate that remains constant over time, or a variable rate that can fluctuate based on market conditions?
Prepayment Implications: Some loans impose penalties for paying off the loan ahead of schedule. Ensure you’re aware of any such restrictions and the potential costs tied to them.
Detailed Fee Breakdown: Not all costs are immediately apparent. Take note of:
- Loan Origination Fees: Costs associated with processing the new loan.
- Late Payment Fees: Charges incurred if a payment is delayed.
- Hidden Fees: Always read the fine print to uncover any less-obvious charges that might increase the loan’s cost.
Key Insight: The purpose of refinancing is to better your financial position. As such, ensure that when you tally up all the fees and interest, the new loan’s overall cost is less than your existing loan.
Apply for The New Loan
Action Step: Gather required documents and apply for the new loan with the chosen lender.
Once you’ve identified the best lender and loan terms for your situation, proceed to the application process.
Make sure you have gathered all of the necessary information you may need for your loan application. This includes your financial history, contact information, employer details, and identification confirmation.
Most online personal loan lenders will accept digital versions or get this data automatically when applying online, but sometimes you have to submit the following information:
- Proof of identity: A copy of your driver’s licence, passport, or Social Security number
- Income & employer verification: Tax returns, pay stubs, or bank statements
- Proof of address: Utility bill, lease, rental agreement, or voter registration card
Be honest and accurate in your application to avoid any potential setbacks.
Use The New Loan To Pay Off The Current Loan
Action Step: Upon approval and disbursement of the new loan, use the funds immediately to pay off the existing loan.
Ensure that the full balance is paid to avoid any additional interest or fees. You may want to confirm with your original lender that they’ve received the payment and that your account is closed or settled
Begin Making Payments to Your New Loan
Action Step: Set up a repayment schedule for the new loan and ensure timely payments.
Now that you’ve successfully refinanced your loan, it’s crucial to stay on top of the new loan’s repayment schedule.
Set up automatic payments if possible to avoid missing any installments. Consistent, timely payments will not only clear your debt but also improve your credit score over time.
Advantages of Refinancing a Personal Loan
Refinancing a personal loan can offer multiple benefits depending on your financial situation, goals, and the current loan terms. Here’s a look at some of the potential advantages of refinancing a personal loan:
- Lower Interest Rate: Secure a more favorable rate if your credit improves or market rates drop, leading to potential long-term savings.
- Reduced Monthly Payments: Lower your payments by obtaining a better rate or lengthening the loan term. Remember, longer terms might result in more interest paid over the life of the loan.
- Shorter Loan Term: Opt for a faster payoff and potential interest savings by choosing a shorter term when financially feasible. That said, you should first inquire about making additional monthly payments to your current loan and achieve the same result without unnecessary origination fees and hassle.
- Consolidate Debts: Merge multiple loans or debts into one, simplifying payments and potentially securing a better overall rate.
- Flexible Loan Features: Access options not in your original loan, like adding co-signers or choosing different repayment methods.
- Improved Cash Flow: Enhance your monthly budget by reducing loan payments, freeing up funds for other purposes.
- Strengthen Credit Profile: Consolidating and maintaining payments can boost your credit score by reducing open accounts with balances.
- Escape Unfavorable Loan Terms: Transition from restrictive or costly loan terms to more favorable ones for peace of mind.
- Removing a Co-Signer: Refinancing allows you to remove a co-signer from your loan if your creditworthiness has improved, freeing them from the financial responsibility tied to your debt.
Potential Disadvantages of Refinancing a Personal Loan
While refinancing a personal loan can offer several benefits, it’s equally crucial to consider the potential pitfalls. Here’s a rundown of some disadvantages to keep in mind:
- Origination Fees and Costs: Some refinancing options include a fee, typically 1%-8% of the loan amount. These fees are not inherently bad, but do need to be calculated into the decision. Leverage our comparison tool to help.
- Extended Loan Term: Prolonging your loan for smaller monthly payments can lead to higher total interest costs, even with a reduced interest rate.
- Prepayment Penalties: Refinancing might not be cost-effective if your current loan contract has a prepayment penalty.
- Impact on Credit Score: Because a new loan application may trigger a hard credit inquiry, refinancing can lower your score temporarily.
- Transition Period: Switching loans, especially with a new lender, may require adjustments like new account setups or changed payment schedules.
- Potential Over-reliance: Habitual refinancing, especially to extend terms for lower payments, can culminate in more interest payments and sustained debt.
- Changing Interest Type: Moving from a fixed rate to a lower variable rate may offer initial savings but carries future rate hike risks. Also be wary of low introductory period loan rates that may be subject to change over the life of the loan.
Who Should Refinance a Personal Loan?
Refinancing a personal loan can be a game-changer for some, while for others, it might not yield the desired outcomes. Determining whether to refinance boils down to individual financial circumstances, goals, and the current terms of existing loans.
Scenarios Where Refinancing Makes Sense:
- Improved Credit Score: If your credit score has significantly improved since you took out your original loan, you may qualify for a lower interest rate, which can save you money in the long run.
- High-Interest Rates on Current Loan: If your existing loan has a considerably high interest rate, refinancing can help you secure a loan with a more competitive rate, leading to cost savings.
- Consolidation Needs: For those juggling multiple loans or debts, refinancing can be a way to consolidate these into one loan, making management easier and potentially securing a better overall rate.
- Change in Financial Situation: If there has been a change in your income or expenses, refinancing can adjust your monthly payments to better fit your current financial situation.
- Escape Restrictive Loan Terms: If your current loan has unfavorable conditions like high fees or inflexibility in repayment, refinancing can help you shift to a loan that is more aligned with your needs.
- Removing a Co-Signer: If your financial stability has improved and you no longer need a co-signer, refinancing allows you to take a loan on your own, freeing the co-signer from any obligations.
Scenarios Where Refinancing Might Not Make Sense:
- Prepayment Penalties: If your current loan imposes significant fees for early repayment, the costs of these penalties might outweigh the benefits of refinancing.
- Short Time Left on Current Loan: If you’re close to paying off your current loan, refinancing might introduce unnecessary complications or fees without substantial benefits.
- Increased Overall Costs: If the new loan, when considering fees and interest over its lifetime, ends up being more expensive than your current loan, refinancing might not be advantageous.
- Frequent Refinancing: Habitually refinancing can be a sign of underlying financial issues. Constantly extending loan terms can lead to prolonged debt and higher interest payments in the long run.
Temporary Rate Benefits: Be wary of loans that offer attractive introductory rates that skyrocket after a period. Such structures might seem beneficial initially but can be costly in the long run.
Should You Refinance Your Personal Loan?
Refinancing a personal loan is intended to improve your financial situation. The objective is to secure more favorable terms, such as a reduced interest rate or a more accommodating payment plan. This strategy aims to save you money and simplify the loan repayment process.
However, if refinancing seems to complicate matters or increase costs, it may not be the best option for you. It’s crucial to assess the effects of refinancing on your finances thoroughly. If the benefits aren’t evident, it might be wise to reconsider. After all, the primary goal is to enhance your financial well-being, not complicate it further.
What does it mean to refinance a personal loan?
Refinancing a personal loan means taking out a new loan to replace and pay off your existing loan(s). It allows you to improve the terms and conditions of your loan agreement to better suit your current financial situation.
Why should I consider refinancing my personal loan?
Refinancing can offer potential benefits such as lower interest rates, reduced monthly payments, a shorter loan term, and the consolidation of multiple debts. It can also provide more flexibility in loan features and improve cash flow.
How does my credit score affect refinancing?
Lenders use it to assess your creditworthiness, which determines the interest rate and terms they offer. A higher credit score can qualify you for lower interest rates and better terms. Here are 8 ways to improve your credit score.
Are there any costs associated with refinancing?
Yes, refinancing can come with various costs like loan origination fees, late payment fees, and potentially prepayment penalties from your original loan. Always read the fine print to understand all associated costs.
Can I refinance if I have a bad credit score?
Yes, it is possible to refinance with a lower credit score. However, having a good credit score can offer more favorable terms.
Click here to check out the best bad credit loans available today.
