Can You Refinance A Personal Loan?
6-Minute ReadJanuary 24, 2022
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 type of personal loan you have. 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?
When you refinance a personal loan, you replace your existing loan with a new one with the potential to save money on interest or secure more favorable loan terms. You can apply for a refinance through your current lender – subject to their restrictions – or a new loan. If approved, a lender 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.
Reasons Why You Should Refinance A Personal Loan
Depending on your financial situation, you may want to look into personal loan refinancing. It makes sense to refinance if your credit score has improved significantly since you took out the original loan, or if your budget is under strain with your monthly payment amount.
Refinancing your personal loan may be a great option. The advantages of a personal loan refinance include:
- You get a lower interest rate. 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.
- It can lower your monthly payments. If money is a little tight, or you want to free up some cash for another purpose, extending your repayment to a longer term loan can definitely help you lower your monthly payments. Spreading out your loan over more months means that your monthly payment amount will drop as you work to balance your budget. Be aware, though, that you may pay more in interest going this route, because you’ll carry the debt over a longer period of time.
- You might pay your loan off faster. 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.
- You can move from a variable interest rate to a fixed interest rate. If you currently have a variable interest rate on your personal loan, it can be difficult to budget your monthly payments especially with constant market fluctuations. By refinancing your personal loan to a fixed interest rate, your monthly payments will be predictable until you pay the loan off.
- It could help you avoid a balloon payment. Some personal loans have a balloon payment, which requires you to make a substantially larger payment than your normal monthly payments once you reach the end of your repayment period. Refinancing your loan can help you avoid having to make this large payment.
When Can You Refinance A Personal Loan?
When you’ve decided that you’re ready to refinance your loan, you may be wondering when you’re able to do so. If you qualify, borrowers are typically able to refinance their loans as soon as they begin making payments on the loan. You can also refinance a personal loan as often as you’d like over its lifetime.
In order to qualify for a refinance, you’ll need to work with your lender (whether it’s your existing or a different lender) to determine what guidelines they have in place for eligible borrowers. In general, these requirements will be maintaining a healthy credit score and having enough money to cover the origination fees on the new loan.
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. Knowing this information and whether or not your lender charges any prepayment penalties for paying the loan off early will be helpful when shopping for the best rate.
2. Check Your Credit Score And Report
The next step in the refinancing process is to review your credit score and report. You can request your free report from the three main credit bureaus (EquifaxⓇ, ExperianTM and TransunionⓇ) on an annual basis. This report is important to understand, because your credit health will be used to determine whether or not you qualify for a better rate or loan term.
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. If your credit score won’t help you secure a better rate, you may want to wait on refinancing and focus on strengthening your credit score.
3. Prequalify For A New Personal Loan
Then, prequalify for your new personal loan. 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. This normally involves a soft credit check, which won’t impact your credit score.
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 LoansSM 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.
Before you seek out a new lender, consider contacting your current lender to see if they may be willing to offer you a refinance of your existing loan with a revised rate and terms. The lender may value your existing relationship and the opportunity to continue working with you.
5. Apply For Your New Personal Loan
Once you’ve committed to refinancing, officially apply for your new personal loan by providing the lender with any required paperwork or verification. If you’re approved after completing the underwriting process, 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.
Be sure to read through your agreement, including the fine print, before signing to make sure that you are satisfied with the terms and conditions of your new loan.
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 it 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.
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.
Do keep in mind that a hard inquiry of your credit that happens at the same time as moving or buying a car could cause issues. That’s because landlords and car dealers run your credit prior to making a decision on your offer. If they find a ding in your credit score, it could raise concerns for them.
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. 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.
If you’re feeling nervous about this whole process, don’t worry. When you apply for a personal loan through Rocket Loans, the process is fast and easy.
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