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, you’re using a new loan to pay off your existing personal loan. Here’s what that process looks like and what to consider before refinancing.
- Can you refinance a personal loan? Yes, here’s how
- What to consider before refinancing a personal loan
- FAQs: Personal loan refinancing
Can you refinance a personal loan? Yes, here’s how
- Decide if refinancing is right for you
- Choose the debt you’d like to refinance
- Determine how you’d like to refinance
- Shop lenders and compare loan terms
- Formally apply with your lender of choice
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.
However, it may make sense to refinance a personal loan under certain circumstances:
- Your credit score and/or income has improved since you originally took out the debt, allowing you qualify for lower interest rates
- Refinancing reduces your monthly payment, freeing money for other expenses
- You want to get out of debt faster with a shorter term loan
- You want a lower monthly payment by extending your repayment term, and are comfortable paying more on your debt in the long term
- You want to switch from a variable interest rate loan to a fixed interest rate loan
2. Choose the debt you’d like to refinance
If you qualify for favorable lending terms — lower interest rates, fewer fees and manageable monthly payments — refinancing may seem like a clear-cut decision.
In general, it’s a good idea to identify loans with higher interest rates and longer repayment terms for refinancing. Some of the types of debt to refinance include:
- Credit card debt
- Secured loans
- Medical debt
- Student loans
Credit card debt
By refinancing credit card debt, you can lower your debt-to-income ratio, which can positively affect your credit. Another benefit: You’ll go from a variable interest rate to a fixed interest rate with a clear path to repayment. That’ll make your payments more predictable.
Just be careful not to charge up your credit cards after opening up your credit lines – you don’t want to end up with additional credit card debt after refinancing it.
Even though unsecured personal loans generally have higher interest rates than secured loans, which are backed by collateral such as your home or car, they still may be a good option if you’re risk-averse.
Say, for example, that you took out a home equity loan to pay for a home renovation project. You may have a solid interest rate but are worried about having debt that’s backed by your home. You might choose to refinance with a personal loan so that, if something goes wrong with your financial situation, you won’t be at risk of losing your home due to an unpaid debt.
In general, you don’t want to refinance medical debt. That’s because medical debt doesn’t tend to come with interest charges. You may be better off reaching out to your medical provider to negotiate over your medical bills. However, refinancing is still an option for you, and it may make sense if, for example, you’re facing high interest on your CareCredit account, for example.
If you have private student loans, refinancing them may make sense if you can qualify for more favorable terms. However, you should think twice before refinancing federal student loans.
When you refinance federal student loans, you lose certain borrower protections, such as access to income-driven repayment plans and deferment. Carefully assess your financial situation and whether it’d be more beneficial to keep or refinance your federal student loans.
3. Determine how you’d like to refinance
You don’t need to refinance with a personal loan. Another popular way to refinance is with a balance transfer credit card.
A balance transfer credit card with a low or 0% promotional APR for 12 months or longer may be a solid way to refinance credit card debt. That is, if you can repay your debt in full before deferred interest kicks in. Even though you’re liable to pay a balance transfer fee based on the amount you transfer to your new credit card, the amount you could save by avoiding further interest charges could be worth it.
Here’s what to consider when weighing these two options:
4. Shop lenders and compare loan terms
Once you’ve made the decision to refinance your debt with a credit card or loan lender, you’ll want to compare companies to see which offers the most affordable borrowing option.
Comparing interest rates, fees and repayment terms is relatively easy because many lenders allow you to see the kind of loan terms you may qualify for with a soft credit check. (A soft credit check doesn’t affect your credit score.)
Be sure to compare how your proposed refinance offers compare with your existing debt. Make sure you fully understand exactly how much your loan will cost you each month including interest, origination fees and any other costs.
5. Formally apply with your lender of choice
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 ding your credit. Lenders may also request supporting documentation from you such as copies of tax returns, pay stubs and bank statements.
Once 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 loan was paid in full. Request that they send you something in writing to keep with your financial records.
What to consider before refinancing a personal loan
Before applying for any type of loan, it’s generally a good idea to see how much your new loan will cost you and how your creditworthiness will affect the loan terms you’re offered.
- Review your credit. You’re entitled to a free credit report every 12 months from credit reporting agencies. You can also use My LendingTree to see your credit score, as well as keep tabs on your financial health and explore potential options for saving money.
- Dispute incorrect information that may be bringing down your credit score and affecting your ability to qualify for new credit.
- Find out if there’s a prepayment penalty if you pay off your current debt early.
- Check if your new loan has an origination fee. Ideally, you’ll find a lender that doesn’t charge this fee.
- Contact your current creditor to find out how much you need to pay off your old debt.
- Make sure you can afford your new loan. You can use a personal loan payment calculator to get an idea of how your new debt will affect your monthly budget.
By checking your credit, you’ll not only know what lenders see before they consider you for a loan but also avoid any unnecessary surprises affecting your ability to get your best loan terms.