Looking to refinance your personal loan? Then look no further, because we’ve covered everything you need to know.
The quick answer to this question is yes. Although you might know that refinancing is a viable option for you now, do you know what it actually means? Why people do it? And how you go about doing it? If you just answered with a trio of no’s, then don’t go anywhere, because we’ll answer each in detail now.
What does refinancing a personal loan mean?
When we talk about refinancing a personal loan, we’re referring to people taking out another personal loan to pay off their existing one.
In many ways, refinancing a personal loan is a way of consolidating debt. Unlike debt consolidation though – where you consolidate multiple debts – you’re simply consolidating one line of credit.
Why refinance a personal loan?
People normally refinance their personal loan to get a better interest rate deal to what they’re currently on.
However, to benefit from this, you’ll usually need a better credit history than you did when you took out your original personal loan. This is because lower interest rates are normally saved for borrowers with better credit histories, as they have a track record of managing money well.
If your credit history has deteriorated since you took out the personal loan you’re looking to refinance, then you might struggle to find a personal loan with a better interest rate.
Lower monthly payments
Another reason some people look to refinance their personal loan is to reduce their monthly repayments, and this can be done by choosing a longer repayment term for your new personal loan.
If you do choose a longer loan term though, remember that you’ll be paying more monthly instalments which could add to the amount of interest you’ll pay overall.
Can I refinance my personal loan with a different lender?
You certainly can. While it’s definitely worth seeing what deal your current personal loan lender offers you, you should absolutely look elsewhere and compare the competition. Due to the volume of personal loan lenders out there, odds are, it’ll be another lender that returns the best interest rate – just make sure you go with a reputable provider, though.
How to refinance your personal loan
Refinancing your personal loan can be broken down into five simple steps:
1. Improve your credit score
If your credit history hasn’t already improved since you took out the loan you’re looking to refinance, before you scout out another loan, take some time to build it. A few easy ways to do this include:
- As always, pay any lines of credit off on time and in full
- Close any unused lines of credit - i.e. store cards
- Make sure there are no errors on your credit file
- Detach your finances from anyone who has a poor credit history
- Stop applying for other types of credit
Improving your credit score will ensure that you’re offered the best possible interest rate – in-line with your unique circumstances – when applying for your personal loan.
2. Do your research
It’s really important that you don’t rush the research side of things. If you do, you could miss out on the best deals, which will minimise the amount you save in the long run.
If you’re keen to stay with your current personal loan lender, once you’ve received a few different quotes elsewhere, it might be worth going back to them and seeing if they’ll match it. If they say no though, don’t hesitate to jump ship.
3. Calculate the costs involved
Before you go ahead and accept another personal loan to refinance your current one, it’s essential that you calculate all the costs involved. In some cases, the costs associated with the refinancing process might actually cancel out any savings accrued, stripping the benefits out of refinancing full stop.
First and foremost, check in with your current lender to see if there’s an early repayment charge for your personal loan. If there is, compare this fee against your potential savings and evaluate whether or not refinancing is still a financially savvy move.
Then there are a few questions worth asking your potential new lender too, like: are there any additional fees? Is there an application fee? Are there any repayment penalties? And are there any restrictions on how the loan can be spent?
4. Apply for your new loan
If you’ve made it to this step and you’re still set on refinancing your personal loan, then you may want to apply for the new loan deal you’ve got your eye on. This process will vary from lender to lender, but with some, it can be done completely online and you may even get the cash in your bank account within the same day.
5. Pay off your personal loan
In some instances, your new personal loan provider might be happy to pay off your existing provider directly. If they’re not, once the money’s in your account, you’ll need to manage the payment yourself.
In any event, make sure it’s definitely paid off by ensuring you get a confirmation letter. If you don’t receive one, contact both your old and new lender (if they paid it off for you) to check the status of the refinancing.
Take your time
We hope you’re now feeling a little more educated on the process of refinancing your personal loan. As with any type of lending, it’s really important that you don’t rush into any decisions, do thorough research, and only take out what you know you can afford to repay. If your mind’s set on refinancing your personal loan, then we wish you the best of luck bagging the best deal!
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