If you’re overwhelmed with how much your loan is costing you each month — or you’ve found a tempting deal with a lower interest rate or more favourable repayment terms — refinancing could help you manage your debt better.
Before you dive right in, you’ll want to first understand how refinancing works, the costs associated with it and when it’s worth doing. Read our guide below to find out more.
Refinancing a personal loan works much like refinancing a mortgage: You apply for a loan to cover the amount remaining on your current loan. Once accepted, you can use the funds from the new loan to pay off the other one.
When refinancing, you’ll still carry the same amount of debt, but you could save money by:
Getting a better loan term
Securing a lower interest rate
Paying lower fees
Is refinancing the same as debt consolidation?
Not exactly. Although they work the same way, consolidating your debt involves paying off multiple loans at once and moving them all to one single loan, while refinancing only deals with one loan. You may sometimes see the two used interchangeably though.
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Why should I refinance my personal loan?
People choose to refinance their personal loans for many reasons, but it usually comes down to these two reasons:
You’ve found a better deal.
If you think you’ve found a better deal, consider using a personal loan repayment calculator to compare the two loan options and see if the move is worth it. When comparing loans, focus on comparing the APR’s, since you’ll be able to compare both the interest rates and the fees. Consider the features of a loan to make sure it suit your needs — for example, if you’d like the freedom to pay off your loan early, confirm there’s no early repayment penalty.
You want lower repayments.
If you’d like to pay less each month on your personal loan, you could refinance it to extend the repayment period — simply find a loan with a longer term. Once approved, you can use those funds to pay off your existing personal loan and then enjoy paying less each month on the new one. Keep in mind that lower monthly repayments usually means the loan is more expensive overall since you’ll pay more in interest over the life of the loan.
How exactly do I refinance my personal loan?
Compare your options. Take a look at available personal loans to see if you can get a better deal than you currently already have.
Consider your refinancing costs. Include origination or other fees for your new loan to ensure that it’s worth your time.
Apply for your new personal loan. If you meet the eligibility criteria for the new loan, submit your application. You may need to mark your loan purpose as refinancing or consolidating.
Pay out your current loan with funds from the new one. Lenders will usually transfer the approved funds into your bank account. From there, you’ll need to transfer the funds into the personal loan account you’re looking to pay off in order to close it.
Make sure your old loan is closed. Confirm with your previous lender that your loan account is closed and your balance is now zero.
What are the costs of refinancing a personal loan?
One-time fees could set you back a few hundred dollars, so confirm if you’ll pay an origination fee or any other fee for getting the new loan.
Some lenders charge early repayment fees, which can put a considerable dent in the savings you could make from switching. Be sure your current loan doesn’t have that penalty. If it does, make sure the savings on interest are more than the early repayment fee.
Is it worth refinancing?
The value of refinancing depends on your current financial situation and terms of your loan. To determine the value of refinancing, it’s important to consider what your current loan is costing you and then compare that to what the new loan would cost. Remember not to forget any one-time fees the lender may charge for setting up the loan.
You could also evaluate any specific features of the loan that you find important. For example, if you’re refinancing from a fixed rate loan to a variable rate loan, you may save money as long as the variable rate lasts. However, these rates are “variable” for a reason: They can go up, leaving you to wonder whether you’d have been better off staying with your first loan.
In short, when determining the value of refinancing, take all aspects of both loans into consideration before making the switch.
When you might want to consider refinancing
Your credit score has improved since you took out the original loan
You want to lower your loan repayments with a better interest rate
Your want to save on interest by paying it back sooner
You want to switch from fixed to variable rates
You want to take a cosigner or co-applicant off your loan
When you might want to consider other options
Your credit score has decreased since you took out the loan
You’re behind on your loan repayments
You’ve lost a source of income since you took out the loan
You don’t want to change the rate or terms of your loan
You’re struggling to meet most lender’s requirements
How to renegotiate a personal loan
Like the lender you’re working with? Another way to get better rates and terms is to renegotiate your personal loan with your current lender. Follow these steps:
Check your credit. This means your credit score and your credit report. You can get an estimate of your credit score based on a soft credit pull online for free. You can also receive a paper copy of your credit report from one of the credit bureaus. Check your credit report for errors to make sure that your score is accurate.
Reread the terms and conditions. Before reaching out to your lender, read your terms and conditions one more time to make sure that there’s nothing preventing you from renegotiating your loan. If there is, refinancing might be a better option.
Get pre-approved with the competition. One way to strengthen your argument is to come to your lender with a counter-offer from another lender on a refinancing loan. If your lender thinks it could lose your business, it might make you an even more competitive offer.
Talk to your lender. This could take some time. Typically, the higher-up the person you’re speaking to, the more likely you’ll be able to negotiate a change. You can start by calling customer service and asking to speak to the representative’s manager until you’re on the phone with someone who has the power to help you get what you want.
Most likely no. Many lenders do not refinance loans they originated, since they’re usually not going to compete with themselves. You’ll find exceptions with mortgage lenders though. You can always contact your current loan provider to see if it’s possible.
There’s no set limit to the number of times you can refinance a personal loan. However, after a certain point, it won’t be beneficial for you to refinance because either you’re almost finished paying off the loan or you have a highly competitive rate already.
Interest rates charged on personal loans vary widely depending on your credit score. If you have a credit score above 800, check out excellent credit loans to see the best rates you could get.
Aliyyah Camp is a publisher helping folks compare personal, student, car and business loans. Prior to joining Finder, she ran her own personal finance blog and wrote for numerous finance sites. Aliyyah earned a BA in communication from the University of Pennsylvania. She likes to go to the movies and go for runs outdoors.
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