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How to refinance your personal loan
Think you can lower your monthly payments? Refinancing might help you save money.
If you’re overwhelmed with how much your loan is costing you each month — or you’ve found a tempting deal to lower overall interest or extend repayment terms — refinancing could help you better manage your debt. But before you jump in, you’ll need to understand how it works, the costs associated with it and if it will actually save you money.
How does personal loan refinancing work?
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 your old one. When refinancing, you’ll still carry the same amount of debt, but you could save money under better terms, a reduced interest rate or lower fees.
The value of refinancing depends on your current financial situation and terms of your loan. It’s important to consider what your current loan is costing you and compare that to what the new loan would cost. Don’t 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. But 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. As another example, you may be used to making additional payments on your current loan to pay it back sooner, but your new lender may not offer this option.
In short, when determining the value of refinancing, take all aspects of both loans into consideration before signing a contract.
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How do I refinance a personal loan?
When you’re ready to refinance, follow these five steps to simplify the process.
1. Compare your options
Before you drop into a new loan contract, take the time to review lenders against your current one. Although some might offer lower rates or slightly different terms, there may be hidden fees that add to the cost of your loan, making it harder to pay back. You should also see if your lender offers a refinancing option — if you’re happy, this could be a good way to get a better interest rate without having to spend time applying elsewhere.
2. Consider your refinancing costs
Your loan contract should have stated how much you’ll end up paying if you stick it out through the entire loan term. Use a personal loan calculator to see how much a new loan could potentially cost you before applying. Having an idea of your credit score and the types of fees the lender charges will also benefit you.
Check for one-time fees, like origination fees, that could set you back a few hundred dollars. Some lenders also 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 one. If it does, confirm that the savings on interest with your new loan are more than the prepayment penalty fee for your old loan.
3. Apply for your new personal loan
Once you’ve found a lender or two that may be right for your refinancing needs, submit an application. You’ll need to provide your lender with documentation that confirms your identity, employment and income. You may also be required to mark your loan purpose as refinancing or consolidating.
Many lenders have a preapproval process that allows you to see your potential rates before they check your credit. See if your lender offers this. If not, you may see your score go down a few points, even if you aren’t approved.
4. Pay out your current loan with funds from the new one
If you’re approved, your lender will likely deposit your loan 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. Contact your lender beforehand to get the full payoff amount — you may need to pay a closing fee that adds a few hundred dollars to your final balance.
Some lenders will transfer the money directly to your old account and pay if off for you. In this case, you’ll just have to confirm that the transaction went through.
5. Make sure your old loan is closed
Whether you pay your old lender directly or your new lender does it for you, you’ll need to make sure the account is closed. Make sure you receive a confirmation email or letter, and don’t be afraid to contact your lender if the payoff hasn’t cleared within a few days. You can also check your credit report — it should be recorded as closed.
When should I refinance my personal loan?
There are quite a few scenarios where refinancing your old loan makes the most sense.
- You’ve found a better deal. Sometimes, you just find a loan with lower rates and better terms. If this is the case, it may save you money overall — or monthly — to refinance your current loan with a new lender.
- Your credit score has improved. If you’ve taken the steps to improve your credit score, then you may be able to take advantage of a lower APR by refinancing your loan.
- You want to lower your loan repayments. If your loan payments are a hefty chunk of your budget every month, then refinancing could give you the opportunity to lower your monthly payments and save money.
- You want to switch from a fixed to a variable rate or vice versa. Depending on your current needs, you may want to change from a variable rate loan to a fixed rate. Or, if you qualify for a low variable rate, take advantage of the dip by changing from a fixed rate.
- You want to take a cosigner or coapplicant off your loan. Some loans require a cosigner or coapplicant, especially if you previous had bad credit. If things have improved and you no longer need the boost from a friend or family member, then refinancing can take the responsibility off their shoulders.
When should I consider other options?
- Your credit score has decreased. Sometimes life causes your finances to take a dive. If your credit has gotten worse since you first took out your loan, it may not be wise to refinance — you’re unlikely to save on interest.
- You’re behind on repayments. Lenders will check your credit when you want to refinance. Being behind on payments means you can’t handle your current loan, and unfortunately, this means you may not be able to afford a new loan, either.
- You’ve lost a source of income. Losing a job or opting for a lower-paying position means your budget is likely tighter than it was when you first got a loan. If a lender doesn’t think you’ll be able to repay your loan, it won’t extend a refinancing offer to you.
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.
- 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’re also entitled to three free credit reports per year, one from each credit bureau. 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 term 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.
- Prequalify 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 more higher up a 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 real power.
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Bottom line
Refinancing your personal loan can help you save from month-to-month or overall. It can take some time to find the right lender and compare your options, but once you do, you can start on the process of seeing if you can get a better rate elsewhere.
And if you’re not sure where to start, you can browse our personal loans guide to see what other types of deals you might be eligible for.
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