Can you refinance a personal loan?
Personal loans can be very helpful when borrowers need to pay off debt, make a big purchase (like a car), or pay for major expenses such as home repairs or vacations. You can get a personal loan from your local bank, credit unions, and online lenders. Once you receive the money, you must pay it back little by little until the loan has been fully repaid, plus interest (this will help build your credit score). After you’ve taken out your personal loan, if you find that you can get a lower interest rate–and that you qualify for that lower interest rate–you can refinance your loan to save money on interest.
What does refinancing a loan mean?
If you’d like to refinance your personal loan, you will need to take out a new loan to pay off the original loan. You may qualify for a lower interest rate, larger amount of money, or a simple cash out refinance. You’ll use that money to pay off the old personal loan with new repayment terms and interest rates. This can help save you money on interest for each monthly payment.
For example, if your old personal loan had a 10% annual percentage rate (APR) on a $6,000 loan amount to be paid over five years, your monthly payment would be around $128, including APR. If you refinance your personal loan for the same amount and same length of time, but with a 7% APR, your new monthly payment is about $119. Over the whole loan, you’ll have saved $520 in interest–and that makes a difference.
Can you refinance your personal loan with a new one from the same lender?
Yes. Most lenders let you refinance your personal loan as long as you maintain good credit. This can help you in a couple of ways:
- Your lender may try to keep you as a customer by offering lower refinance costs on the new loan.
- You may be able to get the loan process finished more quickly with your current lender than if you went somewhere else.
When should you consider refinancing a loan?
You only want to refinance a loan if the end result is going to help you. Here are a few ways it can.
Lowering monthly payments
If you refinance your personal loan, you save money with a better interest rate or APR. You can also stretch the length of time you have to repay your loan. This lowers the amount you must pay back each month. And that allows you to save that extra money or use it to pay off other debts.
Paying off other debts and increasing credit
Having a good credit score can make a big difference when it comes to getting a personal loan or refinancing. And the best way to improve your credit score is to pay off your debts on time. You’ve probably been doing this with your personal loan. Borrowers with better credit score and payment history are more likely to get the lowest personal loan interest rates when it comes time to refinance a personal loan.
Clearing debt faster
It can take several years to pay off a personal loan. During that time, people’s financial situations can change. Maybe now you are able to pay off your personal loan more quickly than you expected. Refinancing your personal loan for a shorter loan term means you usually get better interest rates. That means you spend less money on interest. It also means you can pay off your debt faster.
How to refinance a personal loan
Refinancing a loan, especially with the same lender, is a fairly simple process that only requires a few steps.
Determine how much money you need
When you refinance your personal loan, you’re basically paying off your current loan with a new loan–many times with different repayment terms. Most people who refinance a personal loan take out a new loan in the amount they need to pay off the current loan. Some people decide they need more cash and add more to the new loan amount.
Consider how you want to refinance your personal loan
There are a couple of options when it comes to refinancing a personal loan. One is to simply take out another personal loan (just with better repayment terms that save you money). Then you’d pay that off like you had been doing with your original loan.
Another way is through balance transfer credit cards. These credit cards often come with money-saving offers such as a 0% interest rate for a certain amount of months. Keep in mind, however, that there are restrictions on what can be transferred to these credit cards, and that the 0% interest rate will expire. When it does, you will be paying interest (often more) on the rest of the loan’s balance. So, just be sure to pay off the loan before the credit card’s 0% interest period ends.
Shop around for lenders and banks for refinancing
First, figure out how much money you want for your new loan and how you’re going to refinance it. Next, go online and compare the many lenders and banks. Why? Because there are always some differences when it comes to APR, loan fees, and borrowing limits. Be sure the lender you choose can give you better refinance terms that will save you money.
Pre-qualify & review offers
Part of the personal loan refinance process is pre-qualifying for the loan. This requires what is called a soft credit inquiry. A soft credit inquiry allows the lender to review your credit and figure out if you’ll be able to pay the loan back on time. ALWAYS pre-qualify for refinancing a personal loan. This way you can compare loan offers from different lenders.
Choose lender and apply for the loan
Once you have all your pre-qualified loan options, take some time to review them. Then choose the lender that best fits your needs. Next, submit an application for refinancing your personal loan. This begins what is known as a hard credit inquiry–a hard credit inquiry briefly lowers your credit score. But once you make your monthly payments on time, your credit score should go back up again. Just check with your previous lender (if it was a different one) to make sure that your original loan has been fully paid off with the new refinanced loan. One thing to note: a hard inquiry will stay on a credit report for two years.
Pros of refinancing a personal loan
Shorter loan payoff
Maybe you are now able to make higher monthly payments. A refinanced short-term loan can help because it pays off your debt faster and cuts the amount of interest you’re paying on the loan.
Lower APR
Making your personal loan payments on time helps your debt-to-income ratio get better. This can help you get a lower APR or interest rate on the refinanced loan. And that will save you money on interest each month.
Payment stability
You may have chosen a variable rate (an interest rate that changes) when you took out your original personal loan. Refinancing your personal loan to a fixed rate (an interest rate that doesn’t change) guarantees your monthly payments remain the same. And that allows you to plan the rest of your budget…without surprises.
Cons of refinancing a personal loan
Origination fees
Fees are just one of those things that borrowers have to deal with when they refinance a personal loan. Origination fees–which are between 1% to 10% of the loan amount–are going to be charged no matter where you’re borrowing money from. Even if you’re refinancing with the same lender. When you’re researching where to refinance your personal loan, be sure to add the origination fees for each lender.
Prepayment penalties
You would think that paying off a loan early would benefit everyone. That’s not always the case. Some lenders use a prepayment penalty when a borrower fully pays off a loan before the loan term is complete. This allows the lender to get the interest money they would have been paid if the loan wasn’t paid off early. Check with your current lender to make sure there are no prepayment penalties on your loan. (Sun Loan does not use prepayment penalties, so you can always pay off your loan early with us.)
Higher interest costs
Stretching out the length of your personal loan can often help save you money because you’re paying less of the loan’s balance each month. However, longer-term loans often charge higher interest rates, which could erase any possible savings. Make sure you do the math to see whether a longer loan term with a higher interest rate is more affordable than a shorter loan term with a lower interest rate.
Refinancing personal loans
With a personal loan refinance, you’re taking out a new loan which in most cases, has better terms. This allows you to pay off your existing personal loan, and it can help you save money later. Just do some homework, get pre-qualified for a personal loan with a variety of lenders, and compare their personal loan offers. Then decide which is best for you.
Sun Loan offers personal loans that fit your needs, whether you’re paying off an existing debt or making a big purchase. Our personal installment loans feature good terms, quick processing times, affordable monthly payments, and the ability to keep building your credit as you pay off the loan. Visit Sun Loan online or in one of our local branches to learn how our personal installment loans get you the money you need now and allow you to repay through a set of affordable monthly payments.
