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How to Refinance a Personal Loan
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Refinancing a personal loan may be able to save you a good deal of money, regardless of whether the original loan was for home improvements, paying down credit card debt or any other purpose.
When you refinance a personal loan, you use a new loan or line of credit to pay off your existing debt. Here’s what that process looks like, and what you should consider before refinancing.
What does refinancing mean? The basics
Refinancing is the simple act of taking out new debt in order to pay off old debt. The new debt should have fewer fees and/or more favorable repayment terms in order to make refinancing worthwhile.
For example, if you have a personal loan with a high interest rate, you might take out a balance transfer credit card with a low introductory APR. You could pay less interest over time through a balance transfer to a credit card if you’re able to pay off the balance within the introductory period.
You could also refinance to decrease your monthly payment, so you can increase your cash flow. If you have a personal loan with a high monthly payment, you can refinance the personal loan with a new one with a longer repayment period. A longer repayment period would reduce your monthly payment, though you’d pay more in interest over time by being in debt longer.
How to refinance a personal loan
1. Decide if refinancing is right for you
Before deciding to refinance a personal loan, it’s important to know how to calculate the cost of loan changes. For example, if your existing loan stipulates that a prepayment penalty applies for paying it off early and your refinanced loan requires you to pay an origination fee, costs can add up quickly.
You’ll also want to review your credit to see if you’d be likely to qualify for competitive terms. You can use the LendingTree app to see your credit score, as well as keep tabs on your financial health and explore options for saving money. You can also access free credit reports from each of the three major credit reporting agencies (Experian, Equifax and TransUnion) via AnnualCreditReport.com. Since incorrect or inaccurate information on your credit reports can bring down your credit score, it’s important for you to ensure that all the information on them is correct before comparing lenders.
2. Choose how you’d like to refinance your personal loan
Personal loans offer larger borrowing limits than a credit card. That’s one reason why personal loans are a common tool for combining multiple debts at once. Personal loans also give you the benefit of a structured payment plan, with predictable payment amounts every month.
On the other hand, balance transfer cards can come with special offers, like a zero-interest introductory period for 18 months (and even more, with some cards) on balance transfers. These offers allow you to pay down your debt quickly without incurring high interest costs in the process. Be careful, however: If you don’t pay off the debt before the introductory period ends, you could be charged interest on your remaining balance.
Refinancing with a personal loan vs. balance transfer credit card
|Personal loan||Balance transfer credit card|
|How it works||Take out a new loan to pay off old debt. The new loan should have better terms.||Transfer your old debt on to a new or existing line of credit for a fee.|
High borrowing limits
Predictable monthly payments
Low rates for good- to excellent-credit borrowers
Intro APR lets you aggressively pay down debt over a set period
Offers more flexibility in monthly payments than a personal loan
Difficult to qualify for if you have damaged credit
May have to pay an origination fee of 1% to 8%
May have to pay a balance transfer fee of 3% to 5% of the transferred amount
Variable APR can make interest costs unpredictable
Interest may be added to your debt if the balance isn’t fully paid off when the intro period ends
3. Shop lenders and creditors
Once you’ve made the decision to refinance your loan with a loan or line of credit, you’ll want to compare companies to see which offers the most affordable borrowing option. Consider factors such as the loan or card’s APR, fees and borrowing limits. With a loan, you’ll also want to consider the loan’s repayment terms.
For example, although origination fees are commonly equal to 1% to 8% of the amount borrowed, some lenders don’t charge them at all. On a $5,000 personal loan, this fee represents $50 to $400 that is either deducted from your loan amount or tacked on top of your balance.
On the other hand, if you decide to use a credit card, you’ll need to take into account the typical 3% to 5% balance transfer fee. However, the money you’d save in interest with an introductory rate offer may make a balance transfer card worth it.
4. Prequalify and compare offers
When you prequalify for a loan or credit card, the lender does a quick and informal assessment of your creditworthiness based on a few factors, like your income and savings. They’ll often also conduct a soft credit inquiry, which doesn’t affect your credit score.
You should always prequalify for refinancing your loans and credit card debt, as this gives you the opportunity to see what repayment terms you could qualify for and compare offers from different lenders.
You’ll also want to assess how your proposed refinance offers compare with your existing debt, and whether or not refinancing makes sense for you. Make sure you understand exactly how much your newly refinanced loan will cost you each month, including interest, origination fees and any other costs.
5. Choose a lender and formally apply
When you’ve chosen a loan or credit card you’d like to apply for, you’ll submit a formal application. This will trigger a hard credit check, which will negatively impact your credit temporarily. Lenders may also request supporting documentation, such as copies of tax returns, pay stubs and bank statements.
If approved, your lender may transfer funds to your bank account, mail you a paper check or pay your creditors directly. If you receive loan funds, pay off your original debt quickly to avoid incurring additional costs. It’s likely a good idea to call your current lender and ask them to give you the exact payoff amount of your loan to avoid paying more than you should.
Lastly, you’ll want to follow up with your old creditor to confirm that your debt was paid in full. Request that they send you something in writing to keep with your financial records.
Pros and cons of refinancing a personal loan
Lower interest rates: Depending on your credit, the lender and market conditions, you could snag a lower rate.
Choose your loan term: You can choose a loan with a longer or shorter loan term. The former would result in a lower monthly payment, while the latter would result in lower interest paid overall.
Fixed interest rates: Switching from a variable interest rate debt to a fixed interest rate loan allows you to plan your budget around a fixed monthly payment.
Additional fees: Taking out a new loan or line of credit can come with added fees, like an origination fee or balance transfer fee. These can increase the total cost of the debt. You may also be penalized for repaying your original loan early if the terms include a prepayment penalty.
Higher interest costs: If you’re struggling to make payments on your loan, you may find it helpful to refinance and get a lower monthly payment. However, extending your term often means that you’ll pay more in interest over time.
Qualifying can be difficult: If you’re struggling financially, qualifying for a new loan or line of credit can be difficult, much less one with more favorable terms.
How refinancing your personal loan can affect your credit
When initially applying to refinance a personal loan, lenders will typically allow you to see if you prequalify, which will not impact your credit score. However, if you choose to proceed with the loan, you’ll be subject to a hard credit inquiry, which will temporarily put a slight dent in your credit score.
This may lower your chances of getting approved for a new line of credit right after refinancing your personal loan. However, as you continue to pay down on your debt (and finally pay it off), your credit score can eventually bounce back.
Lenders that allow you to refinance a personal loan
The following are lenders that may allow you to refinance your personal loan. However, each lender has different criteria and requirements you’ll need to meet before you can be approved for a refinance.
|Lender||Best for||APR||Loan amounts||Learn more|
|Avant||Low credit scores||9.95%-35.99%||$2,000 to $35,000||Apply Here|
|Best Egg||Fair credit scores||5.99%-35.99%||$2,000 to $50,000||Apply Here|
|LendingPoint||Rebuilding credit||7.99%-35.99%||$2,000 to $36,500||Apply Here|
|LightStream||Large loans||5.74%-19.99%||$5,000 to $100,000||Apply Here|
|Marcus by Goldman Sachs®||Repayment perks||6.99%-24.99%||$3,500 to $40,000||Apply Here|
|PenFed Credit Union||Small loans||7.74%-17.99%||$600 to $50,000||Apply Here|
|SoFi Bank, N.A||Good credit scores||7.99%-23.43%||$5,000 to $100,000||Apply Here|
|Upgrade||Joint applications||7.46%-35.97%||$1,000 to $50,000||Apply Here|
Can you renegotiate your current personal loan instead of refinancing?
Yes. If you find that you’re having trouble making payments on your loan, your lender may consider renegotiating your personal loan terms to give you a better deal, especially if you’re in good standing with them. This process, called loan modification, essentially draws up a new contract to replace your old one.
When you ask to renegotiate a personal loan, you can request to lower your monthly payment, interest rate or principal balance, or a combination of the three. By making your loan more affordable for you, your lender hopes to reduce the chances of you defaulting on your debt.
Modifying an existing loan usually doesn’t come with any fees, and you can put in multiple requests over the lifetime of your loan. However, each lender will have its own eligibility criteria when considering borrowers for loan modification, including meeting a minimum credit score and having a monthly income. This means that not everyone will qualify.
Similarly, you may be able to negotiate a lower interest rate on your credit card, especially on accounts you’ve had for several years, as you can leverage your (hopefully) on-time payment history and strong credit score.
Refinancing a personal loan: FAQ
When should you refinance a loan?
If you’re considering refinancing your loan but aren’t sure of the best time to do it, a good rule of thumb is to wait until you can secure interest rates that are 1% to 2% lower than your current rates. This means you may have to work on improving your credit score to achieve those lower rates.
Refinancing a personal loan might be a good idea if you need to lower your monthly payments or need the cash to pay down other debts. Conversely, if you can afford a higher monthly payment, refinancing for a shorter term may mean that you can reduce the total amount spent on interest, as well as pay off your debt sooner. Before applying for a new loan, crunch the numbers to be sure that refinancing makes sense financially even after factoring in the associated fees.
Does refinancing hurt your credit?
Refinancing a personal loan may initially negatively impact your credit score, but, over time, it can improve. Refinancing can help you to lower your interest rate and make it easier to pay off debt, which can ultimately help you improve your credit.
Can you renegotiate a personal loan?
Yes — if you’re going through financial hardship and struggling to meet your minimum monthly payments, your personal loan lender may be willing to renegotiate the details of your loan with you. If you find yourself in that position, it’s best to contact your lender as soon as possible so that you can avoid missing payments.