How to refinance a personal loan – Forbes Advisor
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Refinancing a personal loan involves taking out a new loan and using that money to pay off an existing loan. You can refinance a personal loan at any time, but it is more beneficial for borrowers who have improved their credit rating since their initial loan application and will benefit from a lower interest rate.
Personal loan refinancing can also be a good option for people who want to reduce their monthly payments by extending the term of the loan. Keep in mind that refinancing often comes with an initial charge and can lower your credit rating, which can happen when a lender firm credit check as part of the subscription process. You may also be subject to a early repayment penalty initial lender fees.
When is the best time to refinance a personal loan?
With no restrictions in their loan agreements, borrowers can usually refinance a personal loan as soon as they start making payments. However, there are certain circumstances where refinancing a loan makes more sense and is more beneficial to the borrower. Consider refinancing your personal loan if you:
- Access to a lower interest rate based on a higher credit rating or more favorable lending environment
- You want to decrease your payments
- are faced with a balloon payment that you can’t or don’t want to pay
- Are comfortable with the possibility of lowering your credit score as a result of the application process
- You don’t have access to a balance transfer credit card or other source of funds
How to refinance a personal loan in 5 steps
The loan refinancing process varies depending on the lender. However, it is largely similar to the standard loan application process. Follow these steps to refinance your personal loan:
1. Check your credit score
When you refinance a personal loan, check your credit score first. Check with your bank or credit card company, as they may allow you to check your score for free. In general, lenders look for a credit score of 660 when refinancing. personal loans, but a score between 580 and 600 may be sufficient. However, a higher score will give you access to more favorable terms, such as lower interest rates.
If possible, familiarize yourself with your credit score and history before the refinance application process. That way, you’ll have time to make improvements, such as lowering your credit utilization rate, before a lender does a thorough credit check.
2. Buy terms
When your credit score is in good shape, look for traditional and online lenders who offer personal loan refinancing. Start by contacting your current loan provider to see if they are ready to refinance your loan. Your current lender should also be able to tell you your outstanding loan amount so you know what to borrow. Then contact local banks and online lenders to compare interest rates and other loan terms.
When looking for a lender, compare loan terms and interest rates, which typically range from around 3.5% to 35% or more. You should also evaluate each lender’s origination fee to make sure it does not exceed the standard 0.5% to 1% of the total loan amount.
3. Apply for a loan and wait for the subscription
Once you’ve chosen a lender, compile all the information and documents the bank needs to complete your application. This will likely include copies of your most recent tax returns and pay stubs, but the exact application requirements will vary by lender. After your loan application is complete, expect to wait a few hours to a few weeks for approval.
4. Repay the original loan
Once the new loan proceeds are distributed, use it to pay off your original loan balance. Depending on the terms of your original loan, you may also be required to pay a prepayment penalty. Finally, wait for confirmation from the lender that your account has been closed to avoid further fees and penalties.
5. Start making payments on the new loan
After your initial loan has been disbursed and paid off, start making regular payments on the new loan. If possible, sign up for automatic payments so you don’t have to remember to pay every month. Regular, on-time payments will help repair damage to your credit score during the application process and can help build your long-term credit history.
Use a personal loan calculator to determine the savings
It can be difficult to determine if loan refinancing is your best option. However, a personal loan calculator can make it easier to estimate your monthly and overall payments so you know what to expect. Loan calculators also make it easy to compare multiple loans when looking for the best terms.
How a Personal Loan Refinance Affects Your Credit Score
Refinancing a personal loan can impact your credit score in several ways: First, refinancing a loan usually requires a thorough credit check, which can negatively impact your score. However, this is usually a minor decrease and is often offset by the benefits of refinancing. Just make sure you buy loans within a limited time frame (usually 14-45 days) so that the credit bureaus only treat the requests as one for reporting purposes.
Your credit score can also drop when your original loan account is closed as a result of the refi. However, the impact of closing that account will largely depend on when the original loan was issued versus your other outstanding debts and its status in good standing. Most of the time, borrowers can regain their original creditworthiness simply by making on-time payments on the new loan.
Benefits of refinancing a personal loan
- Lower interest rates may be available depending on your credit score and the current credit climate
- Depending on the conditions available, you can choose a longer or shorter repayment period
- Extending the term of the loan means lower monthly payments
- You may be able to switch from a variable rate loan to a fixed rate loan
Disadvantages of refinancing a personal loan
- Lenders typically charge an origination fee of between 0.5% and 1% of the loan amount
- You may have to pay prepayment penalties on your original loan
- Most lenders require a serious credit investigation, which can negatively impact your credit score.
- By extending the term of your loan, you will have to pay more interest over time
Alternatives to refinancing a personal loan
There are really only three alternatives to refinancing a personal loan: The first alternative is to pay off the loan balance and close the account. However, this is usually not an option, and some borrowers resort to a second, less attractive alternative: loan default.
Fortunately, some borrowers also have access to balance transfer credit cards that allow them to transfer the outstanding loan balance and pay it off over time. Borrowers with good to excellent credit scores can have access to a 0% interest rate for an introductory period of 12 months or more. This makes it a great alternative for borrowers with a strong credit history. Keep in mind, however, that many cards charge a fee of between 3% and 5% of the transferred balance.