Learn About Refinancing (Refinansiering) a Personal Loan
Taking advantage of a personal loan refinance will help you get the new one with a revised repayment timeline or a better interest rate altogether. At the same time, refinancing may not be a good option in case you have not improved your credit score or if you wish to extend the term, especially because you will end up paying more than you wanted in the first place.
Securing the lower interest rates will help you reduce expenses, which will allow you to save money on the overall amount you must handle. At the same time, choosing a longer term will reduce monthly installments, but you are more likely to pay a higher amount eventually because the interest will accrue and increase.
When you decide to refinance a personal loan, you will apply for a new one with the same lender or choose a different institution altogether. Then, you can use the funds to pay off the old one and get the new rates and terms that will help you save money. As soon as you finish the process, you can start repaying the new debt through monthly installments.
We can differentiate numerous reasons for refinancing, but the best course of action is to choose the one that will help you reduce the interest rates, which will prevent further expenses. At the same time, you can borrow more money through refinancing, which is another reason for doing it in the first place.
When Does Refinancing a Personal Loan Make Sense?
Similarly, as mentioned above, refinancing makes sense only if you will save money afterward. We can differentiate numerous scenarios that will allow you to make significant savings altogether. For instance, if the interest rates drop and you can obtain lower, you should consider doing it.
1. Better Credit Score
The main idea is to boost your credit score, which will allow you to qualify for lower interest rates on a personal loan. You can do it by improving your credit score, which will allow you to take advantage of better rates and terms altogether. As soon as you enter here, you will learn more about mortgage refinancing.
2. Switch the Rate Type
For instance, if you have an adjustable annual percentage rate on a personal loan, it may be challenging to create a plan to handle monthly installments. At the same time, you will end up paying more than you wanted, especially since the trend in higher interest rates is taking its toll.
Therefore, when you decide to refinance, you can switch from an adjustable to a fixed rate, which will allow you to enjoy consistent payment throughout the loan’s life.
3. Avoid Balloon Expenses
Some personal loans require you to make significant payments compared with the normal installments until the end of the repayment. Instead, you can refinance to avoid this problem from happening.
4. Reduce Monthly Expenses
For instance, you may lose your job, which directly leads to lower income than before. But you will still have a monthly installment you must handle. Therefore, you can choose to refinance a current loan to get a longer repayment period, which will reduce monthly expenses and help you save money as time goes by.
5. Pay Off Faster
If you can afford the higher monthly expenses, we recommend you refinance the current debt into a shorter-term loan. That way, you can repay everything faster, which is the best way to save money.
6. You Can Handle the Expenses
Taking out a refinance loan will come with additional expenses including application or origination fees. The current lender will charge you a prepayment fee especially if you decide to handle everything before the end.
That is why you should ensure that everything makes sense financially by including the expenses within the refinancing, which will help you determine the best course of action.
When Should You Avoid Refinancing a Personal Loan?
In some situations, refinancing is not worth the effort and time, which is why you should stay with us to understand everything about them.
1. Minimal Loan Balance
When you owe a smaller amount on the existing loan, it makes no sense to refinance, changes origination fees and increase the overall principal. Instead, you can work on paying off the balance of the original loan faster, which will prevent you from making additional fees, while allowing you to boost your credit score altogether.
2. Higher Interest Rate
Suppose you apply and the results state that you would get a higher interest rate after refinancing. Then, you should completely avoid that option and wait for the better moment such as when you boost a credit score.
This only makes sense when you cannot afford the monthly installments, meaning you must extend the timeline, which will reduce the monthly payments.
Tips for Refinancing a Personal Loan
1. Determine the Amount
The first thing you should do when refinancing a loan is pay off the existing debt with a new one with better terms and rates. Therefore, before you decide to shop around for the best quotes available on the market, you should determine the amount you need to pay off the current debt.
At the same time, the original lender may require prepayment penalties, which will increase the amount you must get from a refinance. Still, you should consider whether the benefits will outweigh the downsides, meaning calculating each expense and gain to determine the best course of action.
Understanding the exact payoff amount is crucial because you will need to know the refinancing amount you should get to remove the past loan and get only one option for handling.
2. Credit Report and Score
Before refinancing a loan, you should check out the credit report and score to determine whether you should do it or not. It is an essential step that will explain to you whether you qualify for a lower rate than the amount you can currently handle. Of course, if the new interest rate is not as low as you want, you should avoid doing it and wait for a better score.
We recommend you check out the report by requesting the free option at one of the major bureaus such as TransUnion, Equifax, and Experian. It is a report that will show you the entire year, while you can also apply for a weekly option.
When shopping around and asking for quotes, the first thing you should consider is whether a lending institution will do a soft or hard inquiry. A hard pull will cause a score to drop for a few points in the short term. Therefore, when you search for numerous quotes simultaneously, you will hurt a score. Instead, choose quotes with a soft pool, which is prequalification.
3. Research
The crucial aspect of refinancing is research. Therefore, you should compare terms and rates from various lending institutions. Browsing the different options is crucial because the interest terms and rates can differ between lending institutions. At the same time, a new loan with a loan interest may not be the best idea especially if you are paying more for fees.
Before you choose a lender, it is vital to consider whether your loan features a prepayment penalty. That will increase the expenses you must handle. If you wish to reduce the monthly expenses, extending the loan may not be the best idea. Even if you get the lower rate, you will end up paying more in interest throughout the loan’s life.
4. Talk With a Current Lender
You should talk with a current lender throughout the research process. They may provide you with a better deal than the current loan. Since you have a relationship with them, the chances are high that they will provide you with better rates than terms than other lending institutions. At the same time, they do not have to make credit inquiries for the process.
5. Application
The moment you decided on the best lender based on your experience and research, the next step is to submit your application and provide relevant verification including tax documents, bank statements, pay stubs, and Social Security number.
Keep in mind that the loan comparison step is not the same as when you make a formal application. If you wish to qualify after choosing a lender, you must submit a formal application.
We are talking about reading the fine print of the loan and checking out the relevant numbers and points before accepting anything. At the same time, you should take a good look at fees and payment schedules. Suppose you think that the offer is good for your situation. In that case, you should accept it, meaning you will receive funds in a matter of days.
6. Start Making Payments
When you receive funds from a new loan, you can use it to handle the existing loan. We recommend you do it as soon as possible to prevent accruing unnecessary interest or handling additional payments, which will affect your credit score.
As soon as you get the funds, the bank will repay the past loan and you will end up with a new one with different terms and rates. You will handle refinancing (refinansiering) immediately with a new repayment timeline.
The main idea is to make on-time payments, which will keep your score in positive standing and help you increase it as time goes by. We recommend you set auto pay for a new loan, which will allow you to handle each payment directly from a bank account. That way, you can avoid missing a single payment.
Remember that credit score is essential for future loans, meaning you should keep it afloat by making regular and on-time payments as much as you can. A single missing can cause your score to plummet, meaning you should avoid doing it at all costs.