If you’ve been paying on a personal loan for a while, you may find yourself wondering if you can refinance your loan. The short answer is that it is possible to refinance a personal loan if you satisfy certain conditions. Whether refinancing is a good idea for you, however, is dependent on what you’re trying to accomplish. Let’s talk about why you might consider refinancing, how to qualify, and what you can expect in order to determine if it’s the right option for you.
What Does It Mean to Refinance a Personal Loan?
Refinancing a personal loan involves taking out a new loan, either with your current lender or with a new lender. You then use those funds to pay off your original loan and begin making all payments toward your new personal loan. The amount that you originally borrowed isn’t going away; rather, it may be transferred to a different lender with different loan terms.
When Should You Consider Personal Loan Refinancing?
There are several reasons why you might want to refinance your personal loan, including:
- Your credit has improved: Say you have a stronger credit history, your credit score has improved, and you have a lower credit utilization ratio. This may encourage you to explore a new loan with better terms and conditions that favor your improved credit.
- You want a lower interest rate: If your creditworthiness has improved or interest rates have dropped with changes to the economy, you may be able to access a loan with a lower interest rate. This could help you pay less in the long run.
- Your income has changed: A change in income could change what loan terms and conditions work best for you, motivating you to compare new loan options.
- You want a longer repayment term: Personal loan refinancing could allow you to access a longer repayment period and smaller, more manageable monthly payments.
- You want a shorter repayment term: Conversely, you may have the ability to make larger monthly payments and pay your loan off quicker by refinancing.
- You’d like to access more funds: Depending on the lender and your creditworthiness, you may be able to take out a new personal loan with a higher borrowing limit. This allows you to pay off your previous personal loan and access additional funds.
There are times when you may decide to wait to refinance your personal loan—for example, if your loan is almost paid off, if your loan term is nearly finished, if you would have a higher interest rate, or if you’d incur hefty origination and application fees. Keep in mind that loan approval is not guaranteed.
How to Qualify for a Personal Loan Refinance
Not everyone qualifies to refinance personal loans. Key factors lenders may look for include:
- Credit score: A good credit score that indicates responsible credit usage.
- Payment history: A history of on-time payments.
- Income: Proof of stable income.
- Debt-to-income ratio: A lower debt-to-income ratio indicates your ability to pay back your current debts.
If you have a poor credit score, unmanageable levels of debt, or a history of late or missed payments, you may not qualify for a personal loan refinance. Before submitting your application, review your credit score, credit report, and current financial situation to understand your eligibility better. You may also consult with a financial professional to explore all of your options.
Steps to Refinancing: What You Need to Do
While it may vary, here’s the typical process for how to refinance a personal loan:
1. Review your current loan
Take a look at your current loan balance to determine how much you’ll need to borrow from a new lender. This may help you decide what lenders offer the loan size you need. Then, review your current interest rate and repayment terms so you may easily compare them against other loans.
2. Check your credit
Look up your credit score and access a free credit report from one of the credit bureaus (Equifax, Experian, or TransUnion) to determine your current standing. If your credit score is low, you may want to understand what factors you should focus on to improve your rating. If you notice derogatory marks on your credit report, you may want to improve your credit habits before applying for a refinance.
3. Compare loan terms
When exploring loan options, compare interest rates, repayment periods, application fees, and more to determine what makes the most sense for your personal finances. You may favor loans with a lower interest rate or those with longer repayment terms to reduce your monthly payments.
4. Apply for a personal loan refinance
If you decide to refinance and have chosen your preferred lender, begin the application process. Keep in mind that this could result in a hard inquiry on your credit, potentially lowering your credit score.
Some lenders, such as Regional Finance, may offer the option to prequalify. This helps you determine if you might qualify for a new loan without affecting your credit score. However, just because you prequalify doesn’t mean approval is granted once you submit a full application.
5. Manage your new loan
If approved, you may receive the funds needed to pay off your old loan. Payments begin on your new personal loan under the updated terms. Strive to make timely payments and explore benefits like autopay to help keep your credit in good standing.
What to Consider Before Refinancing
In addition to understanding your current financial situation, make sure you compare lenders, carefully review your options, and understand the fees involved with refinancing.
Questions to ask yourself may include:
- Will I have to pay any prepayment penalty fees?
- Is there an application fee for my new loan?
- Is my credit in a good spot to apply for a new loan?
- Are the terms of the new loan more favorable for me than my current loan?
- Am I prepared to have a hard inquiry that could potentially impact my credit score?
- Do the advantages outweigh the disadvantages when it comes to refinancing my current loan?
Whether you want to explore your options or are ready to apply, Regional Finance is here to help. Contact us to determine your options for refinancing personal loans.
The information and materials provided on this website are intended for informational purposes only and should not be treated as an offer or solicitation of credit or any other product or service of Regional Finance or any other company. This website may contain links to websites controlled or offered by third parties. The inclusion of any third-party link does not imply any endorsement by Regional Finance of the linked third party, its website, or its product or services.
Sources:
https://www.bankrate.com/loans/personal-loans/refinance-personal-loan/
https://www.experian.com/blogs/ask-experian/can-you-refinance-personal-loan/
https://www.experian.com/blogs/ask-experian/what-is-refinancing/
