A study by Nerdwallet found out that the average income for most Americans who applied for personal loans is $100,000. And how do they use these funds? Forbes Advisor surveyed in April 2021 via IPSOS to establish what Americans turned to as personal loans for numerous reasons.
The majority of borrowers claim to apply for or refinance another existing loan.
In a Credit Karma report, it is stated that as of 2020, personal loans amounted to $323 billion (setting a new record). This can be attributed to two main reasons. The average personal loan size is steadily increasing, and the increase of more accessible online personal loans.
As the amount of household debt grows, most people find themselves seeking out opportunities that will enable them to settle their debts. And refinancing a personal loan is one such strategy. Read on to understand what it is, how to do it, some advantages, and its downside.
Can You Refinance a Personal Loan
Whenever the topic of refinancing a loan comes up, most people think it’s a way to reset your loan term. This cannot be further from the truth. It is more of replacing an active loan with a new one with lower monthly installments or better interest rates.
Yes, you can refinance a personal loan. When you refinance a personal loan, you take another loan to pay off what you owe elsewhere. The process occurs in three distinct steps:
- New loan application
- Pay off an active loan. Give heed to early repayment fees
- Take on affordable repayment amounts with a lower interest rate
A personal loan refinancing aims to get you a good deal, so you pay less. You can replace an unsuitable debt with an unsecured loan that is more manageable and less risky.
When Should You Refinance Your Personal Loan?
Suppose you have an existing loan and come across another offering lower interest rates. This is an excellent opportunity to take advantage of the good bargain. Thus, consider a personal loan refinance if a lender states an attractive rate of interest.
You can also take up refinancing if there is a significant increase in your monthly income. There is more disposable income to help pay off your loan liabilities.
If you run an online search using a query like ‘I need to refinance my personal loan’, you will encounter numerous pieces of info correlating refinancing to credit score. A recent noticeable improvement in your credit score indicates to the lender that you are a suitable candidate.
Sometimes we take joint loans with friends, family, or colleagues. After a while, you may wish to remove or add a co-applicant. Refinancing the personal loan is possible as you have a new set of terms and conditions.
How to Refinance a Personal Loan in 5 Easy Steps
Find a Credible Moneylender
Start by finding a reputable credit service. Research intensively and read reviews to narrow down your search.
Look into their rates of interest, payoff period, and eligibility criteria. Opt for the lender with the best deal.
Assess Your Credit Scores
Your credit score dictates the type of online installment loans you can access. A higher ranking is impressive to lenders and often qualifies for lower interest rates.
You can calculate your score using an Internet-based credit score calculator.
You may have to spend a substantial amount of time shipping around for the best deals. Make use of an eligibility checker to find a moneyer with the best terms and conditions.
Complete the Application
At this juncture, you have already considered prequalification for a personal loan and figured out the fees. Also, refrain from making numerous applications to different lenders to avoid a high inquiry.
Pay Off the Old Loan
Remember, the whole concept of personal loan refinancing aims to minimize your debt. Therefore, as soon as you get approval, settle the balance of the existing loan.
Pros of Refinancing a Personal Loan
Access to Loans with Lower Interest Rates
The prospect of saving big bucks is the money-saving aspect as a lower interest rate seems lucrative. As you look for suitable lenders, you specifically target those with low-interest rates to help you cut costs.
Shorter Repayment Period
For loanees who can manage a large monthly payment, refinancing to a shorter-term kind of loan reduces your overall expenditure on interest. You clear your debt much quicker.
Reduced Monthly Payments
There is better management of your overall debt with an increase in income. Paying higher installments helps you clear your loan faster, releasing you from debt.
Cons of Refinancing a Personal Loan
Same as almost every other thing on earth, there are a few things that can deter you from refinancing a personal loan. Let us take an in-depth look.
It Negatively Affects Your Credit Score
You may notice a slight drop in your credit score. Experts say this occurs whenever you open a new credit account as you have to answer the hard inquiries from the applications.
May Cost More
You may end up paying more to refinance a personal loan from early repayment fees. To avoid this, thoroughly read the fine print. What are the terms? Some moneylenders quote high fees that outweigh any refinancing deal. The result? You end up paying more in the long run.
There can also be other costs like prepayment penalties and originating fees, which raise your expenditure.
The Final Word
Before you rush to refinance a personal loan, consider if your credit score is healthy and any foreclosure charges you will incur. Also, ensure you research all the details to confirm whether you will benefit from a personal loan refinancing program.
Have you ever refinanced a personal loan? What was your experience? Let’s know in the comment section below.