If you have a personal loan you may be thinking about refinancing. While your reasons may vary, the main objective is clear: you want to reduce your overall costs.
When you refinance a loan, you use a new loan to pay off an existing loan. Why bother doing this? Usually, you can secure a lower interest rate which will save you money over the lifetime of your loan. However, it’s not always so black and white. There are other things to consider like early repayment fees or the cost of applying.
It can get a bit tricky, but with a little bit of research, you’ll have a clear picture of what your refinancing costs will be and if refinancing is right for your situation. In this guide, we’ll break down personal loan refinancing so you can decide if it’s something you’d like to pursue.
How Does Personal Loan Refinancing Work?
First, let’s talk about how this process works. Loan refinancing is a type of debt solution. It’s a way to speed up your debt payoff process. If you’re currently repaying a loan, you might be struggling to get out from under a high interest rate or other fees. If you applied for the loan when your credit rating wasn’t very good, you might be eligible for a better deal now.
Refinancing a loan is an option, and it might even be a good idea depending on your situation. If your credit score has improved, it’s likely you’ll be offered enough of a rate reduction to make any loan fees worth it. Simply put, the pros of refinancing are:
- Lower interest rate – The biggest pro is the lowered interest rate. If your credit, income, or debt-to-income ratio have improved since you applied for the first loan, you’re likely to secure a better interest rate now.
- Shorter payoff period – If you can continue to make larger payments towards your loan, you can pay off the loan faster over a shorter period. This saves you money in the long run and gets you out of debt faster.
You can use your new loan to repay the existing loan, landing a better interest rate. This enables you to speed up your repayment or secure a safer financial future.
When to Refinance a Personal Loan
While it can be a great option, refinancing isn’t a decision you should take likely. There might be other debt solutions that are a better fit for your financial situation and goals.
Here are a few examples of when refinancing is a good idea:
You want to lower your interest rate.
Lowering your interest rate is one of the most common reasons to refinance your personal loan. However, this alone isn’t reason enough to refinance. Make sure to include the cost of any fees and charges in addition to the new interest rate when deciding which loan is best for you. If the fees are still less than your savings, then this is a great option.
You need to consolidate your debt.
If you have several other debts such as credit card debt or other personal loans, refinancing your current loan to combine your debts can help to lower your overall costs. It also makes it simpler to keep on top of your monthly debt repayment. Keeping track of several payment deadlines is a chore, and it could even be risky.
You have home improvements to do.
If you’ve got home improvement costs such as repairs or a remodel, loan refinancing may be a great way to finance these costs and lower your repayments in the process.
You’re about to make some major purchases.
Major purchases like a car, medical procedure, or perhaps a wedding may be another reason to refinance your personal loan to get a better rate and cover the cost of these upcoming expenses. This could fit into a long-term plan, but ensure you have given thought to your repayment schedule as well.
You want to pay the loan off faster.
Finally, if you secure a lower interest rate, you might be able to make up the difference to continue paying off your loan at the same amount each month. This allows you to pay off the debt sooner, saving you big in the long run. If you want to be aggressive with your debt payoff strategy, refinancing might be the right decision.
When Not to Refinance Your Loan
There are cases when it’s not a good idea to refinance. Luckily, they’re pretty clear cut. If your credit score hasn’t improved, it’s not a good idea. While you can still shop around for different rates, it’s better to spend some time improving your credit in the meantime. Before you begin the refinancing process, check your credit score for free to see where you stand.
In addition, if the fees and add-on expenses of the new loan are higher than the savings, it’s best to look into other debt solutions. Luckily, there are a lot of options to consider depending on your type of debt. You might have more options available than you think.
How to Refinance Your Personal Loan
There are a number of reasons to refinance your personal loan. For many, it’s a great way to reduce monthly costs, consolidate expenses, and even pay off debt quicker.
Once you’ve decided to refinance your personal loan, you’ll need to:
- Do your homework – You’ll want to do your homework to ensure that refinancing your loan is the best option. Make sure to include break and exit fees for your current loan, startup fees for your new loan when comparing the costs in addition to comparing interest rates and any other charges such as early repayment penalties. Check out this handy personal loan calculator for help.
- Apply for your new loan – Once you’ve decided on how much money you need, apply for the loan that provides you with the most savings over the long term.
- Pay your current loan with your new loan funds – This part will depend on your particular situation. If you’re consolidating your debts, your lender may be able to arrange this. Otherwise, you’ll need to use your new loan to pay off the balance of your old loan and close it out.
- Check that your old loan has been closed out – Once you’ve paid out your old loan, double-check that balance has been cleared and your account has been officially closed.
- Start making payments – Finally, start making payments towards your new loan. It’s a good idea to set automatic payments and to create a new budget that factors any changes.
It’s this easy to get started. As long as you compare your options and shop around for the best deal and rate, you will have the perfect plan on your hands. While loans can be intimidating, refinancing is a smart move for many people. It’s time to get out from under those pesky high interest rates!
Learn More About Loan Refinancing
Whether you’re refinancing to lower your interest rate or to make room for some additional expenses, doing your research is key to ensure you’re getting the best loan for your situation.
You don’t want to refinance your loan only to find out that you’re actually paying more over the long term because of an overlooked fee or charge. Make sure to conduct a thorough investigation before refinancing and you can enjoy the benefits of reduced fees and rates for years to come.
If you want to refinance your personal loan and are looking for some expert advice, get in touch with our friendly team today at 1300 368 322. We’ve helped thousands of Australians find financial freedom, and we can help you too.