Everything You Need to Know About Refinancing Personal Loans

Personal loans are a great tool when used responsibly. They can be used for debt consolidation, to kick-start your business idea, or complete a home renovation.

But what if things have changed since you took out the loan? Maybe you paid off all your debt and have a much higher credit score. Now you might be considering refinancing personal loan debt so you can pay less in interest.

Here, we tell you everything you need to know about refinancing personal loans.

Things to Know – Refinance a Personal Loan

When you refinance a personal loan, there are several things you need to know to get the best deal. You must have a firm understanding of your current loan, how much you owe, your current interest rate, and any fees associated with paying the loan off early.

Banks institute early termination fees to ensure that you keep paying consistently for the duration of the full term of the loan. What do these fees mean for you? If you pay the loan off early — like when you refinance a personal loan — you’ll have to pay the penalty for cutting short those payments.

You also need to know your credit scores and have a full picture of your complete debt portfolio. If things haven’t changed much since you originated the loan, then it will probably end up costing you more to refinance than you would see savings.

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Advantages of Refinancing a Personal Loan

Many of the benefits of refinancing a personal loan are focused on the new interest rate. You can refinance and get a lower interest rate on the new loan.

Another advantage is the ability to switch the interest rate type from variable to fixed rate since you have a better credit profile now.

There’s also a possibility of being able to lower your monthly payments by refinancing and getting a new loan to take over the old one.

Disadvantages of Refinancing a Personal Loan

The main downside of refinancing a personal loan is that you may be facing a lot of different fees to complete the process.

Make sure you approach a number of different lenders and get a complete estimate that includes all fees. That way, you can weigh the pros and cons of refinancing your personal loan altogether.

How Can Refinancing Affect My Credit History?

When you are looking to refinance a personal loan, the primary way it affects your credit is by putting new pulls on your report.

Every time a lending institution checks your credit — known as a hard credit pull — your credit score takes a small negative hit. Now, this might not be that big of a deal if you have an overall good credit and can benefit from the refinance.

However, you have to be careful about the timing of this pull. If you’re planning on making any large purchases, you need your credit to be as high as possible to get the best rates on items like homes and cars.

If you’re already in escrow on a home, you can’t have any changes occur to your credit profile during the homebuying process. So, if you are considering a refinance, make sure the timing is right for the maneuver.

If you time the refinance correctly, that small temporary decrease in your credit report will quickly reverse since you’ll have a lower interest rate. Plus, it will be easier to make your payments in full and on time.

Is Refinancing Your Personal Loan Right for You?

Only you are going to be able to make this decision. Depending on how different your credit profile is when you originated the loan, a refinance might make good financial sense.

Make sure you go into the process educated and with a firm grasp of the numbers involved. Ask all lenders to provide you with a detailed estimate of all the fees associated with the transaction. Once you have all the information, you’ll be able to make the best decision for you and your debt.

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