Pros and Cons of Refinancing Personal Loans

Did you take out a personal loan when you were in a bind? Was your credit profile less-than-stellar at that time? If you have a loan with a slightly higher interest rate, you’re probably wondering if it’s a good idea to refinance the loan now that your scores have increased.

Here we will tell you all the pros and cons of refinancing personal loans so you can make an educated decision whether it’s right for you.

What Is Refinancing Personal Loans?

Refinancing a personal loan is a method of reworking your original loan terms to negotiate a lower interest rate and potentially lower your monthly payments.

Personal loans are often used for debt consolidation or to take advantage of lower interest rates. If you used a loan to pay off high-interest credit cards because the loan carried a lower interest rate with a more affordable payment, that was a smart decision.

However, now that you’ve got your credit in order, you may be able to refinance the loan itself to get a better deal. Let’s look at the advantages of doing so.

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Advantages

When you refinance your loan, the first loan is closed, and a new loan is opened with the new terms. Essentially, it’s like trading in a car. You go to the bank with your current loan, and they give you a new one that takes over the original amount.

The funds from the new loan pay off your balance, and you’re left with the remainder to pay off from there. Here are the pros of this system:

  • You could get a lower interest rate than what you’re currently paying on the loan. A lower interest rate saves you money in the long run because your payments will make more of an impact.
  • Your required payments could go down. If you’re having any trouble affording your current payment, refinancing could lower the amount you need to pay every month. Not only will your interest rate be lower, but as you’re refinancing the remainder of your loan rather than your original balance, your loan is also smaller.
  • It could end up cutting the number of payments you’ll owe. If you refinance after paying off a lot of the loan, then the amount of money you need to borrow is less. You can borrow just a bit more than you need to pay off the remaining balance and cut the number of payments you’ll have to complete.

Disadvantages

As with everything, there are always downsides too. Here are some of the potential drawbacks of refinancing personal loans:

  • Lower interest rate, but more money owed in the end. While you may get a more attractive interest rate to start, be careful about how much you borrow and pay attention to the loan term. Longer loan terms mean you’ll be paying more in interest regardless of how low the rate is.
  • Having to pay additional fees. When you refinance your personal loan, you could face penalty fees for paying the original loan off early and origination fees for the new loan. That means you’re getting charged extra to end your current loan and more to start the new one. With the fees added, it may not be a great deal to complete the refinance.

When Should You Refinance?

So, now that you know the pros and cons, let’s go over when it’s a good idea to do a refinance. You want to make sure a lot has changed in your financial profile from when the loan originated.

If you have a much better credit score now than when you initially applied, a refinance could be a good thing.

Another great reason to refinance is to change the interest rate type. Maybe you originally had a variable interest rate. With a refinance, you can switch to a loan with a fixed rate, so you’ll have a better idea of how much you’ll be paying back.

Refinancing Personal Loans Is a Great Option for Certain Situations

We hope this article gives you some insight into how refinancing personal loans can help you gain more control over your finances.

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