With unemployment rates soaring, people are scrambling to make ends meet. Personal loans have significantly helped, but some of these personal loans have hefty interest rates. Refinancing might be an option.
It is possible to refinance a personal loan. But it involves taking out a new loan while using those funds to pay off the old one. It can be challenging. However, right now, we’re in a low-interest rate environment, which makes it an ideal time to hunt around for a better monthly payment.
Understanding the Details about Personal Loan Refinancing
When you go to refinance a loan, you apply for a new one with the intention and purpose of getting a better interest rate or more favorable terms. This will replace your previous loan. The good news is, it is easier to refinance a personal loan than it is a mortgage.
You can refinance almost any personal loan and use the money for whatever you need. However, some lenders will only borrow money for specific purposes such as home improvements or medical bills. These are often not eligible for refinancing.
The Point Is to Save Money
But the point with refinancing is to save money while staying afloat. So, if you do this, you must make sure the new loan’s interest rate is lower than the old one. Otherwise, it is an exercise in insanity.
Therefore, after refinancing, understand that you’ll have the same amount of debt but, hopefully, with less interest. This makes it less expensive at the outset. The exception here is if there is an origination fee that comes with the loan. Regardless, even refinancing these can be worth it if the APRs are low enough.
When considering the option of refinancing, think about the length of time given in the terms to pay it back. Changing over to a loan that takes longer to pay off will only be worthwhile if the interest rate also lowers proportion to the total amount owed. It can result in having to pay more interest in the long run.
This is because the loan will accrue additional interest over time. But, shifting to a shorter period to pay off the loan can bring higher monthly payments. However, less interest will accrue overall. So, it will be a balancing act between what is going to be most practical.
Perks and Benefits
Of all the loans available, personal refinancing ones are the easiest. This is because of the minimal amount of paperwork required with less rigorous stipulations to acquire the loan.
Personal loans fall under the category of unsecured loans. This means there are no liens, title work, or other regulations around the specifics of the collateral used. But it also means that this will be incumbent upon the policies of the lender.
The General Procedure for Refinancing
The process is relatively simple; it is about the same as finding an initial personal loan. But there are certain things to keep in mind because there’s already a loan in existence. Consider the following steps:
Check Your Credit and Financial Standing
Get a clear picture of where you stand with credit and finances. Ideally, your credit score should be higher than when you initially got the loan. If you are not in good standing, it will be challenging to find a lower rate. When you know you’re good to go, get prequalified so that you can compare potential terms and rates.
Compare Lenders and Read the Fine Print
Take the time to read through all the personal loan options available to you. Not all loans are equal, and different lenders have varying stipulations. Always look for hidden charges like application or origination fees, anything that can increase the total amount in the long run.
Get rid of anything you won’t qualify for with your current credit score and others that don’t offer a lower interest rate. This should whittle down your options considerably.
Apply for the Loan and Wait for Approval
Depending on the lender, you might be able to apply via an online form. Otherwise, call or make an appointment with the lending agent. Applying should not be a long process, but you still want to take your time with it. Ensure you fill out everything correctly and double-check your inputs.
Usually, it only takes a few business days to hear back about your lender’s decision. Upon approval, you’ll receive your money within the first week.
However, it can take up to 30 days. But this will impinge on the policies of the lender and the amount borrowed.
Pay Off the Old Loan
Once you get the money, pay off your old lender. Some refinancing creditors will pay off your previous loan and then give you the remaining balance. In most cases, though, you will get a lump sum.
Use what you receive to pay off your old loan ASAP- read more here. Two loans at once are overbearing, overwhelming, and troublesome for your credit score. However, some personal loan terms incur a pre-payment penalty. Make sure your old loan isn’t one of these.
Once you do pay off the loan, get written confirmation. This will come in handy if any mishaps come up or in the case of identity theft.
Stay on Top of the New Loan
Be faithful in making your monthly payments on the new loan. If you can swing it, pay more than the minimum amount. This will help pay off the debt faster while saving some money on interest.
This is the gist of how to refinance a personal loan. Of course, there are some variations and other exceptions. But the idea is to get a lower monthly payment to save money while keeping bills and finances in order.
That said, borrowers need to understand the benefits and the pitfalls in refinancing their loans. It is not as straightforward or ideal as most of us would like.