Can You Refinance A Personal Loan?
You received a personal loan and managed it responsibly. Hearing other people talk about refinancing their loans makes you wonder whether you can, too.
The answer is yes – it is possible, regardless of what personal loan type you have. And, depending on your financial situation and goals, refinancing your personal loan could be a really smart idea.
What Does It Mean To Refinance A Personal Loan?
Refinancing a personal loan means replacing your active loan with a new one to save money on interest or secure more favorable loan terms. If approved, a bank will lend you enough money to pay off your active personal loan. Then, you would repay that lender in accordance with the new loan’s terms.
Is It A Good Idea To Refinance A Personal Loan?
Depending on your financial situation, it can make a lot of sense to refinance your personal loan. Refinancing your personal loan may be a great option if you:
- Want a lower interest rate
- Want a longer repayment term
- Want a shorter repayment term
- Want to move from a variable interest rate to a fixed interest rate
What Is The Purpose Of Refinancing A Personal Loan?
Refinancing options can make a significant difference when taking control of your finances. Getting a lower interest rate can help you save money over the life of the loan because you’ll pay less in interest (assuming you keep the same repayment term). If you continue to pay the same amount each month, you can get rid of your loan faster since more of your payment will go to the principal. Or, you can simply enjoy a lower monthly payment due to the reduced interest rate.
If money is a little tight, or you want to free up some cash for another purpose, extending your repayment term can definitely help. Spreading out your loan over more months means that your monthly payment amount will drop, giving you some wiggle room in your budget.
Be aware, though, that you may pay more in interest going this route – even if you secure a lower interest rate. That’s because you’ll carry the debt over a longer period of time.
Conversely, if you’re in a good financial place, you can refinance your personal loan to a shorter repayment period. That way, you’ll knock out your debt faster and may save money on interest since you’re making payments for a shorter period of time.
And if your active personal loan has a variable interest rate, it can be tricky to factor the payments into your budget because they may change. By refinancing your personal loan to a fixed interest rate, your monthly payments will be predictable until you pay the loan off.
When Can You Refinance A Personal Loan?
It makes sense to look at personal loan refinancing if your credit score has improved significantly since you took out the original loan. That’s because lenders reserve the best interest rates and loan terms for borrowers with great credit.
It can also make sense to explore refinancing if your budget is under strain with your monthly payment amount. Extending the repayment period by even 12 months may give you enough breathing room to stay on track.
How To Refinance A Personal Loan
You can refinance your personal loan by following these steps:
1. Determine The Amount Of Money Needed
The first step to getting your new personal loan is checking how much money you still owe on your active loan. You’ll need to borrow at least that much (plus any fees for the new loan) to complete your refinancing.
2. Check Your Credit Score And Report
Next, review your credit score and report. Ideally, you’re in a much better financial position than you were when you took out your original loan. An up-to-date record of creditworthiness can help you get the best deal available.
3. Prequalify For A New Personal Loan
Then, prequalify for your new personal loan. This normally involves a soft credit pull, which will not impact your credit score. Prequalifying gives you an idea of how much you can borrow from your lender as well as your potential interest rate and other loan terms.
4. Shop Around For The Best Rates And Terms
During this phase, shop around until you find the lender with the best personal loan option for your situation. Before officially applying for your new personal loan, you should feel confident that it makes good financial sense. To start your search, use the Rocket Loans Simple Calculator to determine your monthly payments on a new personal loan.
Often, personal loans charge an origination fee as a percentage of the loan. If the origination fee is high enough, it could offset any benefits from a lower interest rate or more favorable loan terms. In addition, if your active loan charges a prepayment penalty, you’ll need to factor that into your decision.
5. Apply For Your New Personal Loan
Once you’ve committed to refinancing, officially apply for your new personal loan. If you’re approved, your new lender may offer to work with your old lender on your behalf to pay off your existing loan. Otherwise, your new lender will disburse the funds directly to you so you can make the final payment on your active loan yourself.
6. Responsibly Manage Your New Personal Loan
Now that you have your new personal loan, all you need to do is make timely payments on your new loan until that obligation is complete. Don’t forget: Borrowers are allowed to pay more than the minimum required each month without penalty. This will allow borrowers to pay off the loan faster and help save on interest.
What Happens When You Refinance A Personal Loan?
As discussed, when you refinance your personal loan, you should see an improvement to your overall financial situation. You may get a better interest rate, more favorable loan terms, or both! Your new loan will pay off your existing loan, leaving you responsible for making payments only to the new lender.
Does Refinancing A Personal Loan Hurt Your Credit?
Refinancing your personal loan can have a slight impact on your credit score. That’s because your new lender will do a hard credit pull before deciding to issue you the loan.
In addition, depending on the credit scoring model being used, closing your old personal loan could reduce your average age of credit, which may cause your credit score to initially drop. Don’t worry too much, though. By making timely payments on your new personal loan, your score should quickly recover from these small dings.
If your credit score has vastly improved, or if your budget is feeling the pinch with your active monthly payment, then it can make sense to refinance your personal loan. But before taking any action, you should first compare personal loan options and be sure that refinancing is actually going to make your financial situation better.
And if you’re feeling nervous about this whole process, we can make securing a personal loan fast and easy.
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