Loan refinancing means taking out a new loan to clear one or more outstanding loans. Borrowers usually refinance their loans to receive low-interest rates or to reduce their repayments ultimately. Taking out personal loans to merge your debt can affect your finances positively and help you stay debt-free.
However, once you’ve been granted a personal loan and your monthly repayments are on time, you may consider refinancing the loan.
It is a smart move if your credit score has improved significantly to a stage where you’ll be offered a rate reduction to compensate for commitments and cost of taking the loan.
When is the best time to refinance your loan?
- Better credit score: One way to be eligible for a lower interest rate on your personal loan is to boost your credit score. If your score has seen an improvement since you took out your loan, it could be a plausible reason to refinance.
- You want to change the existing rate type: Having a variable interest rate on a personal loan makes it difficult to plan for monthly repayments. By opting to refinance your loan, you can switch from a variable to a fixed rate. It enables you to enjoy consistent monthly payments.
How to refinance a personal loan
- How much money do you need?
In refinancing a loan, you’re primarily clearing out the existing loan with a fresh one that has different repayment conditions. Find out the exact amount of money you need to pay off your existing loan. You can also ask if any prepayment fees might exceed the benefits of refinancing.
- Check your credit score and report.
Before considering refinancing your loan, you must confirm if you are eligible for a lower rate than what you’re paying currently. If the new interest rate isn’t notably lower, it may not be worth it. Alternatively, check your credit score to know if there is a difference.
- Do your research
Research is crucial when you are considering refinancing personal loans. It’s worth it to see what different lenders offer and their requirements. You might also need to consider the time factor, a new loan with a lower interest rate isn’t always better if you’re making repayments for a longer time.
- Compare refinance rates
Always compare refinancing rates and pay attention to every rate presented. Draw a table to compare key features and interest rates. Then, based on your research and your discussions with the lender, decide what’s best for you.
Advantages of refinancing a personal loan
- Better interest rate: Not only could a jump in credit score help you get a better interest rate on a new loan, but you might also enjoy lower rates in your transactions generally.
- Faster repayment of loans: When you’re convenient with higher monthly payments, and you want to pay your debt faster, you can refinance a personal loan to get a shorter term. It reduces the cost of interest payments on the loan.
- Extend your repayment period: If you are having difficulty in making timely payments, extending your loan repayment can help you manage your monthly repayments better.
Disadvantages of refinancing a personal loan
- Payment of extra fees: Whenever you are granted a new loan, you might have to bear additional lender cost, which can cut into the benefits of refinancing. Be sure you understand the terms and conditions of your personal loan refinance to help you make the best financial decision.
Taking a refinancing option on your personal loan might be a good idea. However, you need to be careful and with clarity when choosing to refinance other sensitive loan options like a mortgage.