Got a Personal Loan?If you’re thriving, it’d be nice to pay it off faster. If you’re struggling, well, lower monthly payments are *chef’s kiss*
Get Another Loan!Getting a loan to pay off a loan sounds backwards, we know. But it can actually help you manage your debt better.
No, SeriouslyIt sounds backwards, but refinancing your personal loan can help you pay off debt faster or get more manageable payments.
There are tons of reasons to take out a personal loan. Like buying furniture or making home improvements, both of which always cost about three times what you would expect. Or paying for the big wedding your mother-in-law insisted you have but refuses to pay for. Or how about paying off the astronomical medical bills for your luxurious two-night stay in the hospital for appendicitis. And even *knocks on wood* covering funeral expenses for family members, because we can’t even die on a budget anymore.
When you take out a personal loan, a bank basically foots the bill and then charges you monthly installments until you’ve repaid your loan. And of course, they charge that sweet sweet interest—ain’t nothin in this world for free!
What Does it Mean to Refinance a Personal Loan?
If you are in the process of repaying a personal loan, you may consider refinancing. That means that you would replace your existing loan with a new loan through a different lender, and then use your new loan to pay off your existing loan. 🥴
Why pursue such a confusing endeavor?
Refinancing a personal loan can lower your monthly payment, reduce your interest rate and even shorten your loan term. Depending on your circumstance, it could be a smart option to find the right repayment plan for you and save you money in the long run.
But it’s not right for everyone.
Pros and Cons of Refinancing a Personal Loan
Before rushing into refinancing, it’s important to know the benefits and drawbacks to help you make the best decision for your financial position. If you refinance at the wrong time, it can actually cost you more money. 🤢
- If your credit score has improved since you first applied for your loan, you may be able to qualify for a lower interest rate when refinancing. This can save you money over the duration of your loan term.
- If you’re in a great financial position—like if your income has recently increased—you may be in a hurry to pay off your personal loan and get her out of your life for good. Refinancing can allow you to have a shorter repayment period with higher monthly payments. The biggest benefit here is that you will save money in interest over the full term of your loan.
- If you are in a worse financial situation—like if your income recently decreased or you lost your job—refinancing can allow you to have lower monthly payments making it more comfortable to pay down your loan each month.
- Some lenders charge origination fees when you take out a loan, which can range from 0-8% of the loan amount. Depending on your circumstance, these fees could outweigh other possible savings. So it would be wise to crunch the numbers before refinancing.
- Some lenders change a prepayment penalty if you pay off your original loan before the end of your loan term. Yes, you read that right. They penalize you for paying them back early! Make sure your original loan doesn’t have prepayment penalties before refinancing.
- If you opt for a longer repayment period in order to have lower monthly payments, you will pay more cumulative interest over the term of your loan. So while it will help you financially in the short-term, it will cost you in the long run.
- Because lenders check your credit score when reviewing your loan application, refinancing a personal loan can lower your credit score—although usually only slightly and temporarily.
When is it a Good Idea to Refinance?
So should you refinance your personal loan? That’s the million-dollar question. The answer depends on your circumstance. Here are a few situations where it would make sense to consider refinancing:
- If your credit score has had a glow-up moment since you applied for your personal loan—like you have a bangin’ credit score now—you may qualify for a lower interest rate when refinancing.
- If you can’t afford your monthly payments, you can refinance with a longer loan term. This will give you more manageable monthly payments over a longer period of time. It won’t save you money in the long run, but it might be your best option to make ends meet.
- On the contrary, if you recently came into a small fortune or got a promotion, you may be in a position to afford a higher monthly payment. If so, you can refinance your loan with a shorter repayment term to pay off your loan more quickly and save on interest.
- If your current loan has a variable interest rate (meaning that it fluctuates over time), it might make sense to refinance for a fixed-interest-rate loan. That way, it’s not subject to increase during your loan term.
- If you’re about to make a big financial decision—like buying a home or a new car—it’s not a good time to refinance. Make sure there are no big financial needs in the near future so you have time to build up your credit score after refinancing.
How to Refinance a Personal Loan
If you’ve gotten this far and feel like refinancing might be your best bet, follow these steps for refinancing your personal loan:
- Check your credit score to make sure it’s in tip-top shape, and figure out how much money you will need to pay off your current loan.
- Compare lenders for your new loan and consider prequalifying for a loan with multiple lenders. We’d suggest looking at credit unions, as they often have better interest rates and fewer fees than banks.
- After shopping around for a new lender, compare their terms with the terms of your existing loan. Crunch the numbers to make sure that will save you money, even after the fees and interest.
- Once you’ve run the numbers, speak with your current lender. They might be able to offer you a better deal so you can stay with the same financial institution.
- When you’ve determined your best option, apply for your new loan and wait for approval.
- Once you’re approved, you can use your new loan to pay off your current loan. Don’t forget to close out your old loan to avoid fees.
- Start making monthly payments toward your new refinanced loan.