Personal loans are an excellent tool for debt consolidation, making home improvements, buying big-ticket items, and covering unexpected expenses. Personal loans are one of the most versatile loans because you can spend the money on your terms.
Still, if you have a personal loan, you might not be happy with it for various reasons. Perhaps your monthly payments are too high, your interest rate is unsatisfactory, or you’d just like more time to pay it off. These are all great reasons to explore the option of refinancing.
So, can you refinance a personal loan? The short answer is yes. Refinancing a higher rate personal loan at lower rate with a lender, such as your local credit union, can put more money in your pocket each month or help you pay off your loan faster.
Here’s what you need to know about refinancing personal loans, as well as the top questions you should ask yourself before choosing to refinance.
What Is Personal Loan Refinancing?
Refinancing essentially means taking out a new loan that will be used to pay off the old loan. It’s a great way to adjust the terms of a current personal loan if you need to switch things up. Your new loan will likely have a payment schedule, interest rate, and monthly payment.
A common reason for a refinance is the need to spread out the remaining balance over a longer term, resulting in lower monthly payments. However, there are other reasons for a personal loan refinance.
Considerations Before Refinancing a Personal Loan
Before considering a refinance, it’s essential to know what you want to accomplish. Knowing your reason will help you make the best decision possible.
Do you want to pay off your personal loan faster?
When it comes to refinancing a loan, ask yourself if doing so will you you accomplish your overall financial goals. Refinancing your loan to get a faster payoff plan can mean a lower interest rate and total cost for you. Shorter loan terms typically feature lower overall rates. So although you’d have a higher payment now, you may end up with more money in your pocket later.
Do you need more time to pay off your personal loan?
A longer term can mean a smaller monthly payment, which could mean more money for other monthly expenses. However, longer loan terms frequently feature higher overall interest rates. Still, refinancing your loan to spread out your payments can mean more wiggle room for you now – if you need it.
Want a lower rate on your personal loan?
The rate that you receive is based on several factors. However, two primary considerations are your credit score and prevailing market rates. If either has changed since you got your personal loan, you might want to think about refinancing it.
Changes to your credit score
Some people choose to refinance due to an improvement in their credit scores. If your score has improved significantly, you might qualify for a much lower rate than you did on your original loan. However, if your score has only changed minimally, it might not be worth the effort to refinance the loan.
You might also be able to snag a better rate if the market has changed significantly. If the rates being advertised now are much less than when you originally got the loan, a refi could be something helpful to explore.
It’s helpful to remember that just because a low rate is advertised does not mean you will qualify for it. Rates are based on various factors, including credit history, debt to income ratio, and income. Before starting a refinance, check with your lender to get an idea of the rate for which you might qualify.
Rule of Thumb for Rates: Rates are higher for longer terms, larger amounts, and lower credit scores.
Will refinancing a personal loan affect your overall finances?
When it comes to refinancing a loan, the saying goes: “just because you can, does that mean you should.” Ask yourself if doing so will help you accomplish your overall financial goals.
But it’s important to know that refinancing a personal loan can negatively impact your financial situation. Read on to learn more about how and why this happens.
Impact on your credit
When you inquire about a new loan, you will likely see a temporary decrease in your credit score. That fluctuation is a normal part of opening a new account. Your credit rating will return to its previous score with timely loan repayment.
If you have a consistent payment history with your existing personal loan, and make consistent payments on your new loan, refinancing will have little impact on your credit score.
Overall cost to make the change
Always review your loan agreement. Then calculate what you’re paying now and how much it will cost you to make a switch.
TEG FCU does not have a pre-payment penalty for paying back your loan ahead of time, but some lenders do. If your existing loan has this in the fine print, it might not be a huge money saver to do a personal loan refinance.
Apply with several different lenders and shop around for the best rate before choosing where to refinance your loan. Your local credit union should be your first stop for borrowing money as they typically offer lower interest rates or have more flexible terms than other lenders.
Multiple similar credit inquiries performed within a short time are typically only counted as one inquiry and will have little effect on your credit score. So do your homework. It can help you save money in the long-run.
Ready to Refinance Your Personal Loan?
The bottom line is that a little research will help you decide if a personal loan refinance is right for you. Still not sure if it’s a good move? TEG FCU is here to help make big financial decisions easier.