Editor's choice: Upstart personal loans

- Work and education get you better rates
- Fair credit OK
- No prepayment penalty
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.
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.
When you’re ready to refinance, follow these five steps to simplify the process.
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.
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.
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.
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.
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.
There are quite a few scenarios where refinancing your old loan makes the most sense.
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.
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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