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When someone refinances a personal loan, they apply for a new loan to replace an existing one. Refinancing a personal loan can help lower their interest rates or make monthly payments more manageable.
Refinancing a personal loan: What does it mean?
When a person refinances a personal loan, they apply for a new loan (with their current lender or a different one). If approved, they use the funds to pay off their existing loan. There are many reasons to refinance, such as locking in a lower interest rate or extending the term to give them more time to repay the loan.
When is refinancing a personal loan a good idea?
There are several reasons to consider refinancing a personal loan.
Improved credit score
A borrower might not have the best loan if they had a low credit score when they applied for their current loan. They can refinance into a more favorable loan with better rates and terms if their credit has improved.
Struggling to meet monthly payments
If someone struggles with their monthly bills, refinancing helps make their payments more manageable. Refinancing a loan can lower their current interest rate and extend their repayment schedule, reducing their monthly costs.
For example, refinancing from a 36-month personal loan into a 60-month loan spreads their payments over a longer period of time. While taking out a longer loan will lower their monthly bill, and they will likely pay more interest over time.
Want to change the type of loan
Another reason to refinance is to change the type of loan. If a person has a variable loan, their interest rate (therefore, their monthly bill) could increase unexpectedly. If they refinance to a fixed loan, the interest rate remains the same for the entire term. This helps avoid surprises and makes their payments more manageable.
Risks
Naturally, there are a few risks to consider before deciding to refinance a personal loan.
Interest rate & fees
If someone wants to refinance a loan with a longer repayment period, they may pay more interest over the life of the loan. If extending the term helps them stay in good standing with their loan, the benefits may outweigh the costs. When they refinance, there may be origination fees, which could increase the total cost of the loan.
The bottom line
Refinancing a personal loan makes sense in certain situations, like when a person needs to lower their current monthly payments. However, that may come with added costs such as higher lifetime interest and loan origination fees. Refinancing a personal loan may be worth it if it helps make their monthly payments more manageable and gets them into a lower interest rate.
About OneMain Financial
OneMain Financial is the leader in offering nonprime customers responsible access to credit and is dedicated to improving the financial well-being of hardworking Americans.