The Pros and Cons of Refinancing Your Personal Loan

Given the right circumstances, refinancing a personal loan can be an excellent strategy to pay off your debt and save money. Saving money by swapping from high-interest to lower-interest loans is exactly why people apply for refinancing. Yet, refinancing your personal loan may make sense if you want to get a reduced interest rate on an existing loan. Read to know more about how to refinance a personal loan. 

Refinancing a personal loan

While refinancing, you make use of a new loan to pay off an existing personal loan. Usually, the new loan has better terms than the old one, like a lower interest rate or lower monthly payments. Even though you’re applying for a personal loan, you’re not technically taking on more debt. In fact, if you can get a lower APR, refinancing may help you pay off the debt in a jiffy. 

When to refinance a personal loan 

Since refinancing your loan will save you money, you might think it’s always beneficial. But it’s not the same all the time. Here’s when you should refinance a personal loan to get the most out of it. 

• You have a better credit score 

One of the effective methods to get a personal loan with a lower interest rate is to improve your credit score. If your credit score has spiked up since you took out your loan, you might get the best out of refinancing. 

• You want to change your rates 

When you land on a personal loan with a variable APR, figuring out how much you’ll have to pay each month is hard. Not only that, but you might also see a trend that costs you more. By refinancing, you can change from a variable rate to a fixed rate so that your monthly payments will always be the same. 

• You don’t wish to make a balloon payment  

Making a balloon payment means that at the end of your repayment period, you’ll have to make a payment that’s much bigger than your monthly payment. You can avoid this kind of personal loan by refinancing ahead of time. 

• You don’t have enough income 

You may want to lower your monthly loan payment if you’ve lost your job or have less money coming in. In this case, you might want to refinance your current loan so that you can pay it off over a longer period of time. This might not save you money in the long run but could lower your monthly payment. 

• You wish to pay your loan off faster 

You might want to refinance into a shorter-term loan if you can pay more monthly. If you repay your loan faster, you’ll save money on interest in the long run. 

• You can afford the fees 

When you get a refinance loan, you might have to pay fees like origination fees or application fees. If you pay off your loan before the end of the repayment period, your current lender may also charge you a prepayment fee. Before applying for a refinance loan, make sure that it still makes financial sense to do so after fees are considered. 

When not to refinance a personal loan 

In some situations, getting a personal loan won’t be worth the time and work it takes. Here are some situations in which it might not be best to refinance: 

• When you have minimal loan balance  

If you are not responsible for paying that much on your current loan, refinance may not make sense since some loans charge origination fees on top of the loan balance. Instead of paying more fees, try to pay off the rest of your loan or the balance of your original loan faster. 

• When your loan has a higher interest rate 

If refinancing your loan doesn’t get you a better interest rate, you might want to think twice before doing it. This might make sense only if you can’t make timely payments and need to extend the time to pay back the loan so that the payments are lower. 

• You have reached the deadline for repayment  

Refinancing will give you more time if you are getting close to the end of the time you have to pay back your current loan. This means that you will pay more interest charges in the long run. 

Lenders who let you refinance a personal loan 

Here are some lenders with who you might be able to refinance your personal loan. But know that each lender has different requirements and criteria you must meet before you can get a refinance. 

How to refinance a personal loan

Get an approximate of the money needed

When you refinance a loan, you pay off the old one with a new one with different terms. So, figure out how much money you need to pay off your current loan before you look for quotes.  

Also, check to see if your original lender has penalties for paying off your loan early that could make refinancing less worthwhile. It’s important to know the exact amount of your loan payoff because you’ll need to know how much you need to refinance in order to be free of your original loan.

Have a credit check

Have a check on your credit report before you think about refinancing your loan. This is the first step you need to take to see if you can get a lower rate than what you are paying now.  

If the new interest rate isn’t much lower than the old one, refinancing might not be worth it. You can also ask each of the three credit bureaus, Equifax, Experian, and TransUnion, for a free credit report once a year. 

When you’re looking for a new loan, find out if lenders give you a quote based on a soft pull or a hard pull of your credit score. At least in the short term, a hard credit score will hurt your score, so you should get quotes from lenders who show you your rates with only a soft pull.  

Shop around for better rates

When refinancing personal loans, it’s important to do research. Before refinancing, compare rates and terms from different lenders. It’s important to shop around because the interest rates and terms different lenders give you can be different.  

Also, a new loan with an affordable interest rate isn’t always better if you pay more for it overall in fees or by making it last longer than you need to. If you don’t want to pay less each month, it might not be a good idea to extend the term of your new loan past the term of your old one.  

Even if you get a better interest rate, you might end up paying hefty interest because you have to pay it over a longer period.

Communicate with your current lender

Don’t forget about your current lender as you do your research. It may be willing to give you a better deal than your current loan to keep your business. 

Contact your current lender and let them know you want to refinance your personal loan. Ask them if you would qualify and, if so, what the new rate and terms are. 

Apply for the loan

When you’ve decided on a lender whose offer you like best, send in your application and any required proof, such as your SSN, bank statements, etc. 

You’ll need to fill out a formal application if you want to move forward with a loan offer, go through the underwriting process, and get money from the lender you choose.

Make timely payments on your new loan

When you get the money from your new loan, you’ll pay off your old loan with it. This should be handled as soon as possible, so you don’t have to pay extra interest or the loan twice. When you get your loan money, you also start making payments on your new loan.  

With your new interest rate, length of time to pay off the loan, and monthly payment amount, you will immediately start making payments. Your account stays in good shape as long as you make your monthly payments on time. 

Pros of refinancing a personal loan 

Depending on your goals, the benefits of refinancing your personal loan can range from getting a lower interest rate to lowering the overall cost of your loan. Here are some of the perks that come along with refinancing: 

• Affordable interest rate 

You might be able to save on interest if rates have gone down or your credit score has gone up. 

• Quicker loan payoff  

To pay off your personal loan faster, you can refinance it to a shorter term if you don’t mind making higher monthly payments and want to get out of debt faster. This will also lower the total amount of interest you have to pay. 

• Payment stability 

If you switch from a variable rate to a fixed rate, refinancing can help you keep your payments the same. 

• Extended repayment periods  

If you’re having trouble making your personal loan payments on time, extending the terms can help you feel like you can handle them. This is because extending the terms will lower your monthly payment. 

Cons of refinancing a personal loan 

Refinancing is not always the best choice. Before you decide to refinance, think about the following cons: 

• Extra fees 

Every time you get a new loan, you may have to pay the lender extra fees, making it harder to save money. 

• Prepayment penalties 

Some loans charge you a fee if you pay off the balance before the loan’s term ends. Since refinancing means paying off your current loan and getting a new one, you should look at the terms of your current loan to see if you’ll be charged extra for paying it off early. 

• Potentially higher interest costs 

Extending the length of a loan usually leads to higher interest costs in the long run. If you have money problems and want to lower your monthly payment, you could still consider refinancing. Just know that the lower monthly payment probably won’t save you money over time. 

• Credit score impacts 

Refinancing can hurt your credit score because it counts as a new loan inquiry, even if the effect is small and temporary. 

• Research and application time 

Finding lenders, comparing quotes, and sending applications takes time. If you are close to paying off your loan, refinance may not be worth the trouble. 

Does refinancing a personal loan affects your credit score? 

When you refinance, your credit will be checked. This can affect your credit score, but the drop should be short-term if you are responsible for your new loan. Keep in mind that even a small hit could hurt if you’re trying to buy a new car or move into a new apartment. Car dealers and landlords both look at your credit score. If you refinance your loan at the wrong time could make it harder to get a car or a place to live.  

Bottom line 

If you have a personal loan and are thinking about refinancing it, compare the pros and cons, including the interest rate and any fees or penalties that come with paying off one loan and starting a new one. 

At the end of the day, this comparison should help you decide if refinancing will save you money, lower your monthly payments, or both. If you think refinancing will help you, you should check your credit score, look into the interest rate and fees for the new loan, and consider how refinancing can affect your credit. 

FAQs 

Can you refinance a personal loan? 

Yes, you can. A personal loan can be refinanced by taking out a new loan and utilizing it to pay off the old one. If you qualify for a lower APR or monthly payment, it could be a good choice. 

Does refinancing a personal loan make sense? 

It depends on the situation. If you are looking for better loan terms and lower monthly payments, refinancing your personal loan is the best option you have got. If you’re contemplating refinancing your loan but aren’t sure when is best, a decent rule of thumb is to wait until interest rates are 1% to 2% lower than your present rates. This implies you may need to get a better credit score to qualify for the cheaper rates. 

Can you renegotiate a personal loan? 

Certainly. If you are experiencing a financial crunch and are failing to meet your minimum monthly payments, your personal loan lender may be ready to renegotiate the terms of your loan with you. If you find yourself in this scenario, you should contact your lender as soon as possible to avoid missing payments. 

What are my personal loan refinance options? 

A personal loan can be refinanced. To refinance a personal loan, simply take out a new one to pay off the previous one, resulting in a new interest rate and repayment term. Keep in mind that some lenders have restrictions on refinancing personal loans. 

Finding it hard to keep up with the monthly payments and improve credit score? Try refinancing.With Way.com, you get the best refinance options available to you. Use our refinance loan calculator, compare the loan rates, prequalify, and save up to $1850 a year on your refinanced auto loan.