When refinancing a personal loan, that means you are taking out a new loan to repay your existing loan. This can help you get rid of your existing high-interest debt and replace it with a low-interest once. Hence, saving you a lot of money.
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Advantages of Refinancing a Personal Loan
Below are the advantages of refinancing a personal loan:
Better Interest rates
Getting a personal loan to refinance an existing one can help you with better interest rates. With a low-interest rate, you can save money because you don’t have to pay as much as before.
Pay Off Loan Faster
It is possible to refinance a personal loan to a shorter-term, so you can pay the loan off faster. This also helps reduce the interest rates you will pay in total. However, for this to work well, you should be okay with making higher monthly payments.
Payment Stability
Refinancing a personal loan can help you with payment stability. This is true when you shifted from a variable rate loan to a fixed-rate one. With a fixed-rate loan, you will be aware of your loan interest.
Disadvantages of Refinancing a Personal Loan
The following are the disadvantages of refinancing a personal loan:
Extra Fees and Prepayment Penalties
Some lenders charge origination fees and prepayment penalties. This can affect your overall loan cost. Also, it can be expensive.
Credit Score Impact
Since refinancing means taking out a new loan, this can affect your credit score. There is a chance that it can lower your credit score. However, the impact is only temporary and minimal.
How to Refinance a Personal Loan
Here are five steps you should do in refinancing a personal loan:
1. Shop Around
Just like getting a credit card or any funding option, you need to shop around when you plan to refinance a personal loan. Most of the time, lenders offer different interest rates depending on various factors. By shopping around, you will know which loans you can qualify for with lower interest rates, as well as a convenient payoff period and tolerable monthly repayment schedules.
Lenders such as banks, credit unions, and online lenders can help you refinance a personal loan. Suppose you live in the state of Illinois. You can search for personal loans intended for people in Illinois and look for lenders that offer to refinance. This will widen your options and help you decide whether you should refinance a personal loan or not.
2. Check Your Credit Status
It will help if you check your credit score before you opt to refinance a personal loan. By doing this, you will be aware of where you stand in the loan offer process. People with high credit scores have more chances of getting a new personal loan with low-interest. Moreover, people with low credit scores tend to get loans with high-interest rates.
If you currently have a low or bad credit score, it would help if you work on it for some time. You can consider various ways to boost your credit score. Once your credit score is in good shape, you will most likely qualify for loans with low-interest.
3. Know the Fees
It is essential to calculate the fees when it comes to taking out a new loan for refinancing. An online loan calculator can help you figure out your new loan’s total cost, plus the fees. Some lenders charge prepayment penalties and origination fees, as mentioned earlier.
These fees can increase the total cost of your new loan. In other words, even if you happen to get a personal loan with low-interest, you can still end up paying more in the long run because of the fees. Hence, it is vital to figure out the fees.
4. Pre-qualify for a New Personal Loan
Prequalifying for a new personal loan is a less formal evaluation of your credit status. This does not assure you of taking out a new personal loan to help refinance the existing one. However, pre-qualifying can help you picture out what to expect if you apply for the new loan. Moreover, it can help you know if you are qualified to borrow the money you need to pay off the existing loan and the interest rate you might get.
5. Apply for Refinancing
After you’ve done all of the steps above and finally decided to refinance your existing personal loan, it is time to apply. You can do this by filling out an application form from a lender of your choosing. The pre-qualification you went through will undoubtedly come in handy when it comes to applying. This is because you already know what to expect.
Takeaway
Thorough research is vital to help you decide whether taking out a personal loan to refinance your existing loan is right for you. Do you qualify for a low-interest rate? How about a lower payment per month? These are just some of the questions you should think about. Moreover, it would help if you weigh in the pros and cons. Refinancing a personal loan could make a difference to your budget.
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