Can You Refinance a Personal Loan? How to Do It

Can you refinance a personal loan? The answer is yes! You can definitely do it. In fact, it's a great way to lower your monthly payments and get out of debt faster.

So, refinancing may be the answer if you struggle to make monthly loan payments. It's quick, easy, and can save you money in the long run. This post will discuss loan refinancing and how taking a second personal loan to pay a previous loan can translate into making more affordable payments.

What Does It Mean to Refinance a Loan?

To refinance a loan means taking a new loan to pay off a previous outstanding debt.

So, if you decide to refinance a personal loan, it could save you money as the new lender could charge a lower interest rate. You could also choose to refinance a loan to get a longer period to pay off your debt.

Can you Refinance a Personal Loan?

Yes, you can refinance a personal loan. Personal loans are generally refinanced for one of two reasons: to get a lower interest rate or to extend the term of the loan (or both).

Loan Refinancing: an Example

Say you've borrowed a sum of $8,000. After several months you realize that you can't afford the payments because the interest rates are too high. You still have 7 payments left and owe $5,000 approximately. What should you do? You can opt for personal loan refinancing and find a lender that offers great interest rates and longer terms. Then, you borrow the $5,000 you owe and use them to pay the first lender. And because the second lender has friendlier terms (you have one year to repay the amount), you won't have any problem making a monthly payment.

Why Refinance a Loan?

There are several important reasons to refinance a loan. First, you can get a lower interest rate by refinancing, which can save you money until the loan maturity. Second, you may be able to shorten the loan term, which will also save you money in interest payments. Finally, refinancing can also allow you to tap into the equity that has built up in your home if you have been making timely payments and your home's value has increased. All of these reasons can make refinancing an excellent option for many borrowers.

When to Refinance a Loan?

There are a few key situations where it makes sense to refinance an existing loan:

• The interest rate you're currently paying is higher vs. the new rate offered by the refinancing bank.
• The amount of time remaining on your current loan is shorter vs. the amount remaining on the new loan.
• Your credit score and credit history have increased since you got the original loan.
• The fees associated with refinancing (e.g., closing costs) are still lower than the current loan.

When It Doesn't Make Sense Refinance a Loan?

It might not make sense to refinance a loan if:

• You plan on moving soon, or you think you'll need the money from the sale of your home to buy another home.
• You don't have a good enough credit score to get a lower interest rate.
• You would have to pay for refinancing closing costs, which could offset any interest savings you'd receive.
• The amount of time left on your existing loan is short, and you wouldn't save enough money in interest payments to make it worth your while.

Things to Consider Before Refinancing Your Loan

Before you make a decision, ask yourself these questions:

• Are your current payments unaffordable? If you can't make the monthly payments, you should refinance your personal loan.
• Is the new loan available at a lower interest rate? Lower interest rates will allow you to save money.
• Does the new loan have more time to repay? This will allow you to make smaller and more comfortable payments.
• Are the monthly payments of the new loan more affordable? If so, then it's a good idea to refinance your loan.
• Will the application process lower your credit score? Some loans, such as soft pull loans with which you can refinance, have a low impact on your score.
• How much money will you save with refinancing? It might be worth it if you're not saving money but just changing lenders.

Does refinancing a loan hurt your credit score?

It can, but it doesn't have to. When you refinance a loan, your new lender will report the loan to the credit bureaus. If you have a high debt-to-income ratio or if you're refinancing a high-interest loan, your credit score could take a hit. On the other hand, if you have a good credit score and refinancing a low-interest loan, your score could go up.

How to Refinance a Loan: A Step-by-Step Guide

Check your Credit Score

The first step is to check your credit score. A higher credit score will qualify you for a better interest rate on your new loan and could save you hundreds of dollars in interest over the life of the loan.

If you've made timely payments on your previous loan, your credit score is probably higher than when you got the first loan. Because of this, most likely, you'll be able to get better terms. You must know your score to ensure you meet the minimum credit score requirement stipulated by the new lender. Most banks and financial institutions would look for a score of 600 or more. There are a few different ways to get your credit score. You can order a free report from different credit monitoring services like Credit Karma or Mint. Be sure to check all 3 of your scores since each one may be slightly different.

Shop Around

Make sure you consider different lenders before you settle on one and apply. 

Rates can vary quite a bit from bank to bank and even among different products at the same bank. You may be able to get a lower interest rate by refinancing your loan, so it's definitely worth checking into. Be sure to compare apples-to-apples, though - some banks may offer lower rates on their own products but not on loans from other lenders. And make sure you're comfortable with the new terms of the loan before signing up. There's no sense in refinancing if you end up with a higher monthly payment or longer repayment term. Find the top personal lenders here so you can settle on the one that fits your needs.

Apply

Complete the application process carefully. Take your time to collect the documents you must submit and double-check what you've written on the application form. An error could delay the approval process and even lead to a rejection of your application. You can apply to refinance your personal loan online, in person, or by phone. The process generally takes about 15 minutes. To start, you'll need to provide some basic information about yourself and your current loan, including:

• Your name, address, date of birth, and Social Security number
• The amount of money you borrowed
• The interest rate on your loan
• The monthly payment amount
• The remaining loan balance

Armed with this information, the lender will pull your credit report and assess your financial situation. Once they have all the necessary information, they'll present you with a list of offers from which you can choose the one that best suits your needs.

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Pay the Original Loan

While this may seem obvious, it's important to remember that you will still be liable for the full amount of the loan if you don't pay it off before starting the refinancing process. In other words, don't forget to factor in the balance of your original loan. After you receive the money from the new lender, pay off your outstanding personal loan as soon as possible. However, consider that you may have to pay prepayment penalties and closing fees. Once you've paid off your original loan, you'll need to find a new lender willing to give you a loan at a lower interest rate.

How to Find Personal Loan Refinance Options

What exactly should you look for when trying to identify a lender to refinance a personal loan? Here's a checklist you can use:

• Look for the lowest APR.
• Do they charge additional fees that'd make the new loan expensive?
• Do you meet the credit score requirements?
• How soon will the money be available?
• Is the rate fixed or variable? Remember that variable rates can increase the monthly installment.
• Is the personal loan application process online, or do you need to go to a branch office? Online loans are paperless, and the process is quicker.

Is it Always a Good Idea to Refinance Your Loan? Pros and Cons

Maybe you're thinking of looking for a personal loan refinance option to refinance a high-interest loan. Many borrowers get a better rate and terms when refinancing their loans.

But loan refinancing has pros and cons that you should consider before refinancing. Here are the points you need to consider when you are deciding whether you should refinance a personal loan:

Benefits of Refinancing a Personal Loan

• When refinancing a personal loan, you could get a lower annual percentage rate (APR) on a new loan.
• You could also get more time to repay. A longer loan term, say, one that increases the repayment period from one year to three years, could reduce your monthly installment significantly.

Cons of Personal Loan Refinancing

• A longer repayment period has its downsides. Although you'll be paying a lower monthly installment, your total interest cost will likely go up. So, in dollar terms, you'll end up paying more.
• Some lenders charge origination fees for refinanced loans. This could range from 1% to 10% of the loan amount.
• When you repay the original lender, prepayment penalties and closing fees may be applicable, adding to your overall cost.

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