Many people automatically think about mortgage when they hear about refinance. But it’s not just a home loan that can be refinanced. In fact, almost all types of loan are viable for refinancing, including your personal loan.
The idea of refinancing a personal loan appeals to many, either because it lets them increase their cash flow or save money by getting a lower interest rate. Indeed, refinancing a personal loan can let the borrower restructure his or her finances. But it also takes some careful consideration, else you might end up paying more for the new loan than you would with your current one.
Common Reasons for Refinancing a Personal Loan
A personal loan is flexible in its use. There are no term restrictions as to how you should spend every dollar of your money. For this reason, many borrowers are attracted to personal loans. They also offer lower interest rates than credit cards.
Personal loans can be refinanced for:
- Consolidating debts. Take all debts into one new loan for more convenient single payments every month.
- Fund an emergency expense. This includes house improvements, paying for emergency medical bills, a holiday vacation or a family event. etc.
- A major purchase such as downpayment for a car, wedding fund, and more.
How Do I Refinance My Personal Loan?
>>Improve your credit. If you’ve improved your credit profile compared to the last time you took out your loan, you can qualify for lower interest rates which will help you save money in the new loan. If you decide to refinance, you can wait a bit longer to build good credit and demonstrate to the lender that you are a secure investment. You can do this by paying off your credit card debts, for example, or paying your monthly bills on time.
>>Compare offers from lenders. Ask around for estimates but don’t forward an application at the same time. Ask friends for possible reliable recommendations. Compare rates using online calculators until you are left with one or two choices. At this point, you may go back to your first choice and give them the chance to compete for the deal. If you have an outstanding credit rating, you are most likely going to get better terms because of higher lender confidence on your capacity to repay.
>>Consider online banks or P2P lending. Non-traditional lenders such as peer-to-peer lending groups offer competitive rates as well. Online banks offer lower interest than their brick-and-mortar counterparts because of the lack of expenses that usually go to human resource in traditional banks. Explore these options and you can may end up saving some thousand dollars on your new loan.
>>Review your loan and ask questions. If you are refinancing with your current lender, the paperworks can be streamlined but if you are getting your new loan from another lender, the process can take longer. At this point, you will have to forward some documents that affirm your creditworthiness such as income and asset statements, and other financial information.
It is also important for you to get your questions cleared before the whole refinancing process rolls. These questions might include extra fees involved, repayment period, prepayment penalties, and application fees among others.
>>Close out your original loan. Make sure to close out your original loan. If you refinanced with your old lender, they will take care of the closing for you. If you’re refinancing with a new one, closing will have to rest on you. Failure to do so might result into some expensive consequences.
Refinancing could be advantageous but like any financial decision, caution is necessary. Refinance only when it makes sense, when the rate market is favorable, or when your credit score makes it possible for you to get lower rates than you had on your original loan. Use online break-even calculators to make sure you’ll not be losing money instead when you refinance.