How to Refinance a Personal Loan

If you’re paying off a personal loan, you may be searching for ways to pay less interest or lower your monthly payments. Refinancing can offer a solution, as it lets you replace your current personal loan with a new one.

Depending on your financial profile, you might qualify for a better interest rate than you have currently. Plus, you can choose new repayment terms with a monthly bill that works for your budget.

Here’s how to refinance a personal loan, including when it makes sense and when it wouldn’t be the right move for you.

[Read: Best Personal Loans.]

When to Refinance a Personal Loan

Here are some scenarios where refinancing a personal loan could be beneficial:

Your credit score has gotten better. If your credit score was weak when you initially took out your personal loan, you might have gotten saddled with a high interest rate. A good credit score of 670 or above could help you snag a better rate. “If your credit score has improved since you took out the original loan, you may qualify for better terms, making refinancing a wise choice,” says Jamie Hopkins, senior vice president of private wealth management at Bryn Mawr Trust.

You need to reduce your monthly payments. When you refinance a personal loan, you can choose new repayment terms. Choosing a lengthier term could get you lower monthly payments. At the same time, extending your terms means paying more interest in the long run.

You’re looking to pay off your loan ahead of schedule. Borrowers with extra room in their budgets could refinance to a shorter repayment term and get out of debt faster.

You want to change your interest rate type. If you took out a personal loan with a variable rate, you might want to switch to a fixed rate in a rising-rate environment, which refinancing would allow you to do.

When Not to Refinance a Personal Loan

Here are some times when personal loan refinance may not be a good fit.

You can’t qualify for a better interest rate. If your credit isn’t strong enough to get a lower interest rate, there may not be much point to refinancing. Replacing your loan with one that has a higher rate could increase your costs of borrowing.

You’ll face high loan fees. Keep an eye out for fees that could make refinancing more costly. Some lenders charge origination fees that may add up to 12% of your loan amount, although borrowers with good credit can usually avoid these fees. Find out if your current lender charges a penalty for prepayment, too. “The savings resulting from the new, lower interest rate might not be sufficient to justify paying the prepayment penalty,” says Ohan Kayikchyan, a certified financial planner.

You’re almost done paying off your loan. If you’re almost finished paying off your personal loan, refinancing may not be worth the effort. Plus, you run the risk of adding time to your loan and racking up fees.

[Calculate: Use Our Free Mortgage Calculator to Estimate Your Monthly Payments.]

How to Refinance a Personal Loan

If refinancing a personal loan makes sense for you, here are the general steps you’ll need to take:

1. Check your credit. Lenders examine your credit closely when evaluating your application for a loan and assigning your interest rate. Check your credit score before you apply, and review a copy of your credit report to ensure it’s error-free.

2. Research lenders. Every lender sets its own qualification criteria, rates and terms on personal loans. Explore banks, credit unions and online lenders, and check with your current lender to see if it could offer you a good deal.

3. Prequalify for personal loan refinancing. Whenever possible, check your personal loan rates through prequalification, a quick process that won’t impact your credit.

4. Compare loan offers. Look for a personal loan with a competitive annual percentage rate, low (or no) fees, an acceptable repayment term and monthly payments you can afford.

5. Submit an official loan application. Once you’ve selected a loan offer, you can fill out a full application with your personal details and verifying documentation, such as pay stubs and a copy of your ID.

6. Use your new loan to pay off your old one. Once the lender issues your new loan, you can use the funds to pay off your original loan. Some lenders can pay off your creditors for you.

7. Make payments on your new loan. Confirm that your old loan has been paid in full and closed, and start paying back your new personal loan on your agreed-upon terms.

How Refinancing Can Affect Your Credit Score

Refinancing a personal loan can have a slightly negative impact on your credit score in the short term, but it will likely have a positive impact in the long run.

“Initially, refinancing can cause a slight dip in your credit score due to the hard inquiry that occurs when you apply for a new loan,” says Hopkins.

As you make on-time payments on your loan, though, you should see your credit score bounce back. Refinancing may also help you pay off your loan faster, which could have a net positive impact on your credit.

[Read: Best Debt Consolidation Loans.]

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