Why You Should Consider Refinancing a Personal Loan Now
A personal loan can be a good way to pay for major expenses or consolidate debt such as credit card debt.
Making payments on time for a personal loan is one of the best ways to improve a credit score, and can eventually improve a score enough to make refinancing the loan worthwhile.
If interest rates are down, as they are now, then refinancing can lower the monthly payments or allow the loan term to be extended to help make it affordable.
Here’s how to pre-qualify for a personal loan so that the loan you already have can be refinanced:
What is Refinancing?
You could go through your current loan provider to refinance a personal loan, but you don’t have to.
Like any other loan, it can pay to shop for the best rate.
Refinancing a loan means you’re paying the existing loan off with a new loan. The new lender will pay off the old one, and you’ll make payments to the new lender.
The purpose is to move the loan to a lower interest rate, which will save you money on monthly payments. Or you could shorten the repayment term and pay it back quicker, which would save you money on total interest paid.
Interest rates and the loan rate are just two reasons to refinance.
You may also want to refinance because you have a better credit score than you did when you first took out the loan.
A higher credit score can help you qualify for better loan terms. All of your good work has finally paid off, giving you a good chance to redeem some of it with a lower interest rate.
You may also want to change your loan from a variable interest rate where monthly payments can change, to one with a fixed rate where payments are the same each month.
Some personal loans require balloon payments at the end of the repayment period. They can be much larger than a normal monthly payment, and can be avoided by refinancing.
If your income has dropped and you can’t afford the monthly payments, then refinancing to a lower payment can make it affordable. A longer repayment term can help cover a job loss until you’re back on your feet again.
How to Refinance
Refinancing can be as easy as shopping for online quotes from lenders and picking the best deal.
The best place to start, however, is by doing some homework before looking for a new loan so that you don’t make any refinancing mistakes when refinancing your personal loan. Start by asking your current lender exactly how much money you need to pay off the loan.
Your online account may give you that information, though a call to the lender will give you the most updated figure. Ask if there are prepayment penalties. Make sure they don’t eat up too much of your savings by refinancing.
If you haven’t already done it, check your credit score. This is key to qualifying for a lower interest rate and a loan with better terms. You can check your score for free once a year from each of the three credit bureaus, or ask your bank or credit card issuer to provide a free score.
When you start shopping for lenders, check if they’ll do a soft pull or hard pull of your credit score when giving you a quote. A hard pull can hurt your credit score for a while. Lenders will do soft pulls, which won’t affect a score.
Don’t just compare interest rates with lenders. Additional fees and new terms could make it more expensive than what you’re already paying. Extending the repayment term beyond your current loan’s final due date can make the monthly payment cheaper, but it will likely cost you more in interest over the longer time frame.
Make a personal loan calculator your new best friend and figure out how loans compare.
Before switching to a new lender, contact your current lender to see if it will offer you a better deal than your current loan. They probably want to keep your business and can check if you pre-qualify without making a credit inquiry.
Once you’ve found a lender you want, submit your application online or in person, and provide any information they need to verify your information. Pay stubs, bank statements and tax statements, among other things, will likely be needed.
Read the fine print of the loan and understand any fees, the payment schedule and if there are prepayment penalties.
The new loan can be funded within a few days. Use it to pay off the current loan, or your new lender may send the money to the old lender to pay it off.
Finally, Set Up Automatic Payments
If refinancing a personal loan can save you money, it can be a worthwhile process. Your improved credit score has likely made this possible.
Now is the time to make sure your score remains high.
Set up automatic payments with your new lender so that a payment is never missed. This may not have been a problem with your old lender, and there’s no reason to let that happen now.
If it did, your credit score could drop. And while that won’t affect your new loan, it could make it harder to get other loans in the future.