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How to Refinance a Personal Loan

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Personal loans can be a great way to finance goals like home improvements or pay down credit card debt but you may be able to save even more money by refinancing your personal loan.

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 to consider before refinancing.

What does refinancing mean?

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 by moving the debt onto the credit card, if you can pay off the balance within the introductory period.

You could also refinance to decrease your monthly payment to increase 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.

Can you refinance your personal loan with a new one from the same lender?

Yes, many lenders offer the option to refinance a personal loan with the same bank. But it’s best to check in with your lender to be sure.

As personal loans can be used to fund any need, you can also refinance a personal loan as often as you like. Generally, requirements include maintaining good credit and qualifying with the lender.

Can you refinance a personal loan? Yes, here’s how

1. Decide if refinancing is right for you

Before deciding to refinance a personal loan, it’s important to know how much it will cost you. 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 will add up quickly.

You’ll also want to review your credit to see if you’d be liable 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’re also entitled to a free credit report every 12 months from credit reporting agencies via AnnualCreditReport.com. As incorrect or inaccurate information on your credit reports can bring down your credit score, it’s important you ensure all information on them is correct before comparing lenders.

Pros Cons
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 shorter or longer loan term. The former would result in lower interest paid overall. The latter would result in a lower monthly payment.

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.

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 difficult, much less one with more favorable terms.

Can I borrow more money than I need to refinance?

Yes, and in some cases, you should. When you refinance a personal loan, you should make sure you have enough money to cover the debt plus any additional origination and prepayment fees. You can also choose to borrow more funds to refinance additional debts you owe. This is known as debt consolidation.

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 on balance transfers. These offers allow you to pay down your debt quickly without incurring high interest costs in the process. Be careful, however: In some cases, if you don’t pay off the debt before the introductory period ends, you’ll be charged interest from the date you transfered over your 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.
Pros
  • 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
Cons
  • Difficult to qualify for if you have damaged credit
  • May have to pay an origination fee of 1%-8%
  • May have to pay a balance transfer fee of 3%-5% of the transferred amount
  • Variable APR can make interest costs unpredictable
  • Interest may be added to your debt if the balance is unpaid 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 the typical 3% to 5% balance transfer fee into account. However, the money you save in interest with an introductory rate offer may make a balance transfer card worth it.

You can compare offers via prequalification. This typically only requires a soft credit check, which doesn’t affect your credit.

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 fully 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 from you 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 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.

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, 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.

Before speaking to your current lender, consider these tips:

  • Review your credit history and correct any potential issues beforehand to increase your chances for approval.
  • Discuss your loan modification options with your lender as soon as you expect financial issues, rather than after missing one or more payments. The better your relationship is with your lender, the more likely they will be to renegotiate your personal loan terms.
  • Expect to explain the reason for your request, your current income, how you plan on increasing your income in the near future, how much you can afford to pay every month and any other financial obligations you’re responsible for.
 

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