Can you refinance a personal loan? The answer is yes. Refinancing a personal loan can save you alot of money by replacing your existing loan with a new loan that potentially has a lower interest rate and monthly payment. Refinancing your loan may be a good option if you need to extend your repayment term or lower your current rate.
There is a crucial trade-off to consider. On the one hand, refinancing a personal loan can reduce your borrowing costs through lower interest rates. However, on the other hand, refinancing your loan may extend your payment term, resulting in more interest paid in total throughout the life of the loan. Whether or not you should refinance depends heavily on your situation.
Refinancing a personal loan: What does it mean?
Refinancing a personal loan means applying for a new loan to pay off your old one.
For example, let’s say you took out a $1,000 loan at 21% APR for 12 months. Six months in, you’ve paid off $500. However, your disposable income is tight, and you need to save some money.
You decide to refinance your existing loan, search for lenders and apply. After filling out an application, you receive a response. A new lender is willing to offer you a $500 loan for 12 months at 14% APR.
The interest rate on your newer loan is lower, but your repayment term has been extended to twelve months. If you proceed, your monthly payments will be lower than your previous loan. However, you have to pay interest for six months longer, meaning you may end up paying more in interest in total.
When should I refinance a personal loan?
You should refinance a personal loan if it helps you save money. For example, if interest rates have dropped or your credit score has increased, refinancing a loan can help you receive a lower interest rate and save money.
On the other hand, if your loan balance is small, you’ve nearly paid it off, and your interest rate is higher, refinancing your loan may not make much sense.
Six situations where it makes sense to refinance
Here’s a list of situations where refinancing a personal loan may make sense:
- Your credit score increases: The lower your credit score, the lower your interest rate. If you find your credit score has improved since you took out your loan, refinancing it may be a good option.
- You want to switch from a variable to fixed interest rates: Having a fixed rate loan gives you more peace of mind because you know exactly how much you’ll have to pay each month. With a variable rate loan, your interest rate could increase depending on the economic situation. Refinancing may be a perfect fit if you want to switch from a variable to a fixed rate loan.
- Avoiding balloon payments: Some personal loans may come with a balloon payment, meaning you pay less during the early days of the loan and pay a more considerable amount at the end of your term. Refinancing a personal loan ahead of time may help you avoid balloon payments if they are relevant.
- Lower-income and need to save money: Life happens. If you lose your primary source of income or your income has been reduced, refinancing a personal loan could help you save money by decreasing your interest rate and monthly payment.
- Get rid of debt quicker: Some people don’t like holding onto debt. Most personal loans give you 3+ years to repay. However, if you want to pay it off sooner and can afford the larger monthly payment, refinancing your loan to a loan with a shorter term can help you get out of debt faster.
- You can afford to pay the fees: Some lenders charge origination, prepayment, or application fees. Make sure you can afford to pay the necessary fees before considering refinancing your personal loan. If you find that you don’t save much by refinancing after adding all the costs together, you should probably reconsider.
Three situations where it doesn’t make sense to refinance
Refinancing your loan may not always be the best move. Here’s a list of situations where it doesn’t make sense to refinance:
- Your remaining loan balance is small: If your loan balance is small enough, refinancing it may not help you save money. Some lenders charge origination and application fees when you apply for a loan. Instead of paying additional fees, focus your efforts on repaying your existing balance.
- Your new interest rate would be higher: Many factors are at play when calculating your credit score. If your credit score or income decreased from when you initially applied, or you haven’t been paying on time, your interest rate may be higher. Refinancing a personal loan won’t make much sense if your interest rate and monthly payments go up. Focus on repaying your existing loan instead.
- Your existing loan is nearly fully repaid: If you took out a $2,000 personal loan for 24 months and are 20 months into the loan, refinancing your loan may not benefit you very much. Refinancing your loan will extend your term, costing you more in interest in the long run.
How to refinance a personal loan in six easy steps
Refinancing a personal loan is simple. Here’s a six-step process you can follow to help you secure the best deal:
1. Check the remaining balance on your loan and figure out how much you need.
Refinancing a personal loan involves applying for a new loan to pay off your old one. Before shopping around, check the remaining balance on your existing loan and figure out how much money you need.
As part of this process, read through your existing loan contract to see if there are any associated prepayment penalties. A prepayment penalty charges you for paying off your loan faster than agreed.
Either log into your lender’s online portal, review your contract or call them to figure out if there are any prepayment penalties associated with your existing loan.
Once you’ve figured out the amount you need to pay off your old loan, move on to the next step.
2. Review your credit report and credit score
Your interest rate depends heavily on your credit score and credit report. If your credit score is lower than before, you may qualify for a lower interest rate. If your credit score is higher, you may receive an interest rate higher than what you currently pay.
You can request a credit report through one of the following methods:
- Online: Visit AnnualCreditReport.com to order a free copy
- Third Party: Track your credit score and view reports on myFico.com or creditkarma.com
- Phone: Call (877) 322-8228
- Mail: Download and complete a credit report request form and mail it to the following address:
Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348 – 5281
Refinancing a personal loan will be a great choice if you find your score has increased since you previously applied.
3. Pre-qualify and shop around for personal loans.
Shopping around for different rates will be critical. Before you refinance a personal loan, compare rates from other lenders to ensure you get the best deal. Lenders have different ways of pricing loans, so you want to ensure you’re not missing out.
The fees charged by lenders also vary. Some have origination and application fees, while others choose to charge interest. If your new loan offer has a lower interest rate but the fees they charge are significantly higher, you may not benefit from refinancing your loan with that particular lender.
Another critical component is the prepayment penalties associated with your existing loan. Some lenders charge borrowers for repaying their loans early. If you don’t have such restrictions, refinancing your current loan could be a perfect option.
Refinancing a personal loan may not be a good option if you care about the total interest you pay. For example, if you took out $1,000 for three years and nearly paid it off with three months remaining, refinancing your loan could extend your term to 3+ years, depending on your choice. While your monthly payments may decrease.
4. Discuss the situation with your current lender
Your existing lender may be willing to work with you and provide you with a better rate.
Considering that you already have an established relationship with them, and your lender probably doesn’t want to lose your business, they may be willing to make accommodations in light of new circumstances, such as a lower credit score.
Applying for a personal loan refinance with your existing lender may speed up the process because they wouldn’t have to make another credit inquiry to provide you with an offer.
If your existing lender isn’t willing to refinance your loan, move on and begin speaking to others who will.
5. Apply for a loan
After comparing your offers and settling on a loan, complete your application by providing any additional documents needed for verification, and sign your contract.
You will receive funding once your loan officer has verified all your information.
6. Pay off your old loan.
Once you’ve received your funds, pay off your existing loan to complete your refinancing transaction.
Some lenders insist on competing for this step for you by paying off your creditors directly. Others may trust you to pay off your old loan yourself.
If your lender insists on paying off your loan for you, they will usually disclose this early on in the process.
7. Start making payments on your new loan.
Now that you have paid off your existing loan, you need to begin making payments for your new loan. Some lenders require. Making on-time payments can help you avoid defaults and ensures your account remains in good standing.
Refinancing your loan with a payroll deduction loan
If you’re interested in refinancing your existing loan, you could save a lot of money using a payroll deduction loan.
A payroll deduction loan is similar to a personal loan, except that monthly payments come directly from your paycheck.
Payroll deduction loans typically have lower interest and acceptance rates than traditional loans, so it may be a great fit if you’re interested in saving money by refinancing.
Stately Credit offers simple and affordable payroll deduction loans and salary advances if you need to refinance your existing loans or cover emergency expenses.
The Bottom Line
Refinancing your existing loans can help you save a lot of money. If your credit score has increased and you feel you could get a better deal, begin pre-qualifying with different lenders and compare rates. If you find that your new rates are higher than your existing ones, you can back out of the process and choose to refinance at a later date. Stately Credit offers affordable payroll deduction loans that can help you refinance your loans and save money in the process.