If you refinance a personal loan, you replace your current loan with a new one. Since this strategy can save you on interest or lower your monthly payment, it’s definitely worth considering. Use a loan payment calculator to compare the old loan with the new one to see how much your monthly payment would be, and consider the following as you explore personal loan refinancing.
Your Credit or Income Has Improved
Financial circumstances are not set in stone and often change over time. If your credit or income has gone up since you initially took out your loan, you may lock in a lower interest rate by refinancing.
You Need Lower Monthly Payments
Your monthly payments may no longer work for your budget. If you’ve lost your job or moved to a more expensive area, for example, a refinance can extend your loan term and potentially lower your monthly payment. However, it should be noted that refinancing may lead to more overall payments as the loan’s lifetime may be lengthened.
You Hope to Pay Off a Loan Sooner
Refinancing can allow you to shorten the length of your loan and increase your monthly payments. This is a great option if you have some extra cash at your disposal and would like to pay off your loan sooner, free up your monthly cash flow, and focus on other financial goals. Of course, most loans these days don’t have prepayment penalties, so you can pay off early without refinancing. But accelerating your payoff is a good strategy when combined with a refinancing that lowers your interest rate.
You Want to Switch From a Variable Interest Rate to a Fixed Rate
While a variable rate is typically lower than a fixed rate at first, it can change over time and lead to higher payments in the future. By refinancing your personal loan to a fixed interest rate, you can enjoy predictable payments that you’ll be able to plan for in advance.
How to Refinance a Personal Loan
If you decide that a personal loan refinance does make sense, follow these steps.
Figure out how much money you need: First off, check how much money you owe on your current loan. You’ll need to borrow that amount plus any applicable fees to complete the refinancing process.
- Check your credit: Visit AnnualCreditReport.com to pull your credit reports from the three major credit bureaus: Equifax, Experian, and TransUnion for free. If you know where you stand credit wise, you can get an idea about whether or not you’ll qualify for a better rate or term.
- Prequalify: Prequalifying is a great way to find out what type of refinance offers you’re eligible for without any impact to your credit.
- Shop around: Not all refinancing offers are created equal. Shop around to compare rates, terms, and fees until you find a lender with an offer that is a good fit for your unique situation. You may or may not decide to refinance with your current lender.
- Apply: Fill out the formal application online or in-person. Be prepared to provide details about your current loan and submit some documents like your ID and proof of income.
- Pay off your current loan: Upon approval, your lender will distribute the funds so you can pay off your current loan. Once you do, make timely payments on your new loan until you’ve paid it off.