The term “refinancing” refers to the process of switching out one set of personal loan payments for a new set of payments. If your current lender allows it, you may refinance with them, or you might look for a new one. Personal loan refinancing will provide you with a new loan with new conditions to pay off your old debt. The impact on your credit scores, if any, may be positive or bad, depending on the circumstances.
Is It Wise To Get A New Loan To Pay Off An Old One?
In the following scenarios, personal loan refinancing might be a good option.
- By refinancing, you may be able to get a more manageable interest rate than you are now paying, saving you money over time. If your credit score has gone up since you initially got your personal loan, you may be able to get a lower interest rate on a new loan. You may be able to get a better interest rate because rates are now low, or because your credit is good enough to qualify for a lower rate.
- Refinancing may help you save money in the long run by extending the life of your loan and so reducing the amount you have to pay each month. For instance, if you are having trouble making payments on a loan with a duration of 36 months, you may be able to decrease your payment each month by refinansiering lån into one with a term of 48 months. This is accomplished by extending the amount of time over which you must pay off the debt. Don’t forget that if you prolong the loan’s duration in this way, you may wind up paying more interest overall.
- However, if your financial position has improved, going from a longer payback term (say, 36 months) toward a shorter term of the loan (say, 24 months) would allow you to pay off the loan considerably quicker, putting you out of debt sooner and perhaps saving you money on interest. In addition, the loan calculator that you can find on nearly every bank and credit union website will be able to assist you get a better idea of this.
The Possible Drawbacks Of Getting A New Personal Loan
Think carefully about the risks involved in refinancing your personal loan before making a final decision.
- There is no guarantee that people would save more money if the interest rate is reduced.
- It’s possible that you’ll end up spending more money on interest during the life of the loan, even if the new, longer term has a lower rate. Interest accrues proportionally more slowly during a shorter loan period. Your loan’s overall interest cost may go up, even though your monthly payments are lower.
- Costs that may accumulate
- Additional expenses, such as origination charges or penalties for prepayment, may be associated with some types of personal loans. Click here to read more on prepayment penalties. If you’re hit with both, you’ll have to shell out more cash to cancel your previous loan and then more to open your new one.
- It’s possible that you’ll end up paying more for your refinanced loan overall, even if the interest rate is lower than the one you’re now paying. Consider not just the interest rate and monthly payments, but also any extra fees and origination costs associated with any personal loan you’re considering.
- What the borrower must pay to have access to the lender’s funds is expressed as a percentage called the interest rate. However, the APR represents the borrower’s yearly cost of the loan. The annual percentage rate (APR) for a loan incorporates the rate of interest with fees as well as other extra charges to offer you a more complete view of the total amount you will pay for a loan well over the duration of a year.
Looking To Reduce Your Regular Payment Amount?
After considering all of your options, you may be ready to go forward with the refinancing process.
Do your research
When refinancing a personal loan, compare loans as you would for a mortgage or credit card. In this approach, you’ll have a better shot at securing the most advantageous interest rate, longest repayment time, and most affordable monthly installments possible.
The best person to ask about refinancing your personal loan is the bank or credit union currently holding the loan. You might also look for a personal loan on a financial website, or check into your local credit union to find out about their membership requirements so you can seek a personal loan through them.
Look at various lenders’ histories.
Numerous complaints about installment loans are filed annually with the Bureau of Consumer Financial Protection. Some of those customers claim they were given inconsistent advice regarding what they needed to provide in order to apply. Meanwhile, some buyers have griped about being surprised by interest or other expenses.
Researching potential online personal loan providers might help you avoid being blindsided by fees or conditions. If you look around online, you may discover BBB (https://www.bbb.org/) ratings and other information that may assist you to decide which lenders to work with.
The next step is to check your credit ratings.
It’s important to know where you are financially before deciding on a loan refinancing offer. A higher credit score increases a person’s likelihood of being offered a better interest rate. Indeed, higher interest rates are often associated with worse credit ratings.
There are a variety of possible credit scores, and you can find handy guides online which will help you figure out what your credit score says about you to lenders.
Calculate the costs
The added interest and fees from things like origination and prepayment may be estimated with the use of a loan calculator online. All loan calculators work in the same fashion, so you can locate one online and enter your information to find out what the costs might come out to be.
As we discussed before, these charges may make it such that a refinanced loan, even with a reduced interest rate, nevertheless costs more than the original loan.