Everything You Need To Know About Refinancing A Personal Loan

From consolidating debt to making home improvements, there’s any number of reasons you might consider using a personal loan. As you pay back the loan, circumstances can change, however.

For example, market interest rates might go up or down or your personal finances might look considerably different than they did when you first took out the loan.

Should you consider refinancing your personal loan if circumstances have shifted? In short: maybe. Let’s walk through everything you need to know about the refinancing process, including how it works, the pros and cons, and how to apply.

Can You Refinance A Personal Loan?

In many cases, it’s possible to refinance a personal loan. If you elect to pursue this option and are approved by a lender, you’ll take out a new loan with updated loan conditions. The new loan is used to pay off the old loan, leaving you to only make payments on the new loan.

Your new loan balance, interest rate and repayment timeline will all be negotiated as part of the refinancing process. You can refinance with the same lender you received the original personal loan through, but it’s not required. In fact, it’s a good idea to contact multiple lenders before committing.

Should You Refinance A Personal Loan?

As with any financial decision, refinancing a personal loan has advantages and disadvantages that you should carefully consider. Next up are the most important examples of each.

Pros

Consider these benefits of a personal loan refinance:

• You could get a lower interest rate. A lower interest rate can help you save money over the life of the loan. If you continue to pay the same amount each month, you can get rid of your loan faster since more of your payment will go to the principal. Or, you can simply enjoy a lower monthly payment due to the reduced interest rate.
• It can lower your monthly payments. If money is a little tight or you want to free up some cash for another purpose, extending your repayment period can lower your monthly payments. Be aware, though, that you’ll pay more in interest going this route. That’s because you’ll carry the debt over a longer period of time.
• You might pay your loan off faster. If you’re in a good financial place, you can refinance your personal loan to a shorter repayment period. You’ll knock out your debt faster and save money on interest since you’re making payments over a shorter period of time.
• You can move from a variable interest rate to a fixed interest rate. If you have a variable interest rate on your personal loan, it can be hard to budget for monthly payments due to the potential for market fluctuations. By refinancing your personal loan to a fixed interest rate, your monthly payments will be predictable until you pay the loan off.
• It could help you avoid a balloon payment. Some personal loans come with a balloon payment, where you make a substantially larger payment at the end of your repayment period than the monthly payments up to that point. Refinancing your loan can help you avoid having to make a balloon payment.

Cons

Consider these drawbacks of a personal loan refinance:

• You could pay more in interest. You can lower your monthly payment by extending your loan’s term, but that extra time will incur more interest. You’ll ultimately end up paying more than you would with a shorter term.
• You may owe additional fees. Often, personal loans charge an origination fee that’s a percentage of the loan amount. If the origination fee is high enough, it could offset any benefits from a lower interest rate or more favorable loan repayment term. In addition, if your active loan charges a prepayment penalty, you’ll need to factor that into your decision.
• Refinancing can affect your credit score. A personal loan refinance can negatively affect your credit score by way of a hard credit inquiry.
• You might not get a lower rate. If your credit score hasn’t improved since you took out your original loan, you could end up with the same interest rate or even a higher one. The same is true if market rates have climbed since your initial loan approval.

How To Refinance A Personal Loan

You can refinance your personal loan by following the steps discussed below.

1. Decide Why You Want To Refinance

Are you looking to capitalize on lower interest rates? Do you want to shorten your loan term to pay the loan off faster? Or, are you, conversely, looking to extend your loan repayment term to lower your monthly payment?

The first step in getting a refinanced personal loan should be determining exactly what you’re looking to achieve by refinancing. This will allow you to have much more productive conversations with prospective lenders.

2. Check Your Credit Score And Credit Report

The next step in the refinancing process is to review your credit score and credit report. You can request your free report from the three main credit bureaus (Equifax®, Experian™ and TransUnion®) weekly at AnnualCreditReport.com. This report is important to understand, because a lender will use your credit profile to determine whether you qualify for a better interest rate or loan term – or qualify to refinance your personal loan at all.

Ideally, you’re in a much better financial position than you were when you took out your original loan. An up-to-date record of creditworthiness can help you get the best deal available. If your credit score won’t help you secure a better rate, you may want to wait on refinancing and focus on strengthening your score.

3. Prequalify For A New Personal Loan

Next, prequalify for your new personal loan. Prequalifying gives you an idea of how much you can borrow from your lender as well as your potential interest rate and repayment term. Prequalification typically involves a soft credit check, which won’t impact your credit score.

Keep in mind that you’ll need to borrow at least your current loan balance in order to refinance.

4. Shop Around For The Best Rates And Term

Shop around until you find the lender with the best personal loan option for your situation. Before formally applying for your new personal loan, you should feel confident that the option you’re pursuing makes the most financial sense. To start your search, use the Rocket Loans Simple Calculator to determine your monthly payments on a new personal loan.

Before seeking out a new lender, consider contacting your current lender to see if they may be willing to offer you a refinance of your existing loan with a revised interest rate and repayment term. The lender may value their existing relationship with you and jump on the opportunity to extend it.

5. Apply For Your New Personal Loan

Once you’ve committed to refinancing, formally apply for your new personal loan by providing the lender with any required paperwork or verification. If you’re approved after completing the underwriting process, your new lender may offer to work with your old lender on your behalf to pay off your existing loan. Otherwise, your new lender will disburse the funds directly to you so you can personally make the final payment on your active loan.

Be sure to read through your agreement, including the fine print, before signing. This way, you can be certain you’re satisfied with the conditions of your new loan.

6. Responsibly Manage Your New Personal Loan

Now that you have your new personal loan, all you need to do is make timely payments on it until that obligation is complete. Don’t forget: Borrowers can pay more than the minimum monthly amount without penalty. This will allow you to pay off the loan faster and save on interest.

FAQs: Refinancing Personal Loans

Here are the answers to some questions that frequently pop up on the topic of refinancing personal loans.

How soon can I refinance a personal loan?

You can generally refinance a personal loan as soon as you start making payments, assuming you qualify for refinancing. One exception is if your lender includes a cooldown period as part of your loan conditions. While this practice is more common with larger loans, such as mortgages, you’d need to wait for that period to expire before refinancing.

Does refinancing a personal loan hurt my credit?

Applying to refinance will trigger a hard credit check, which will likely lower your credit score by a few points short-term. However, if you make your payments on time and consistently pay on any other debt you have, such as credit cards, you can actually increase your credit score in the long run.

Can I refinance a personal loan for a larger amount?

Yes, with two important caveats. First, you’ll need to qualify for the loan. Second, make sure you’re comfortable with your new monthly payment, which may be higher.

Final Thoughts

If your credit score has vastly improved, market interest rates have dropped, you need a lower monthly payment to relieve pressure on your budget or any of the above, refinancing your personal loan can make sense. Before plowing ahead, though, it’s wise to compare personal loan options and be sure that refinancing is going to make your financial situation better.

To see if you prequalify for a personal loan with Rocket Loans℠, start an application today.