Are there any pros or cons to refinancing a personal loan? Yes
There are a variety of reasons to consider refinancing a personal loan. You may need more cash than you presently have.
You might be seeking a lower loan repayment, a higher interest rate, or a different payment timetable.
In this post, we’ll go through both the pros and cons of refinancing a personal loan. This might help you make an informed selection about what’s best for you.
- What is personal loan refinancing? How does it work?
- Pros of refinancing a personal loan
- Cons of refinancing a personal loan
- Get The Loan Comparison Calculator
- When should you refinance your personal loan?
- Frequently Asked Questions
What is personal loan refinancing? How does it work?
Refinancing is the act of switching your present loan for a new one. You may use your current lender to apply for this second loan, or you can seek out another to handle it for you.
Some lenders may not refinance loans from other lenders, while others will only permit you to do so if the amount you owe on your current loan is lower than the total outstanding balance.
You may take out a new loan to cover the remainder of your present loan, or you can borrow additional money.
You might be able to pay off the rest of your outstanding loan while still having money left if you refinance with a larger debt.
Typically, people opt to refinance to obtain more money or improved loan terms.
The following are several of the characteristics that may alter with refinancing:
- Repayment term
- Payment schedule
- Interest rate
- Payment amount
Your new loan agreement is based on your existing financial status, among other factors.
If your financial condition has improved, you might be able to negotiate better loan terms like a lower interest rate.
Keep in mind: You may be charged more interest in the long run if you refinance and receive a longer payback period.
You may also like: Are Personal Loans Worth It In 2022?
Pros of refinancing a personal loan
There are several benefits to refinancing a personal loan.
Keep in mind that if you refinance your loan, you may not be able to take advantage of all these perks. You must choose which benefits are most important to you.
1. Lower Interest rate
The interest rate is the cost of borrowing money expressed as a yearly percentage rate that you will pay.
It does not take into account any fees or other expenditures associated with the loan. If your interest rate is high, you are paying more for your loan.
You may be charged a higher interest rate if your credit score is bad.
If your credit score has improved since you applied for a prior personal loan, you may be able to save money.
2. Lower monthly payments
You might be able to lower your loan payments by refinancing.
Taking out a longer loan may result in lower monthly payments even if your interest rate remains the same.
The term for repaying a loan is the payback period, which is determined by your creditworthiness and the number of funds required.
The faster you repay your loan, the lower your interest rate will be when you finally pay it back.
If you’re having trouble keeping up with your payments, this might be a helpful option for you.
You will, however, pay interest over a longer period and may wind up spending more money if you extend your repayment term.
You may also like: Is it better to apply online vs in person for a loan?
3. Repayment term is shorter
It may be difficult to budget when you are in debt.
If you want to get out of debt as soon as feasible, refinancing can help you obtain a loan with a lower monthly payment.
If your refinanced loan has a lower interest rate and you don’t increase the amount of your loan, you may be able to pay it off sooner if you get a shorter term.
A longer repayment period, on the other hand, implies that your payments will be larger.
4. More money
If you refinance a loan, you may be able to get more money.
Assume you have a $600 loan that needs to be paid off.
If you refinance and receive a loan for $1,000, you’ll receive $600 to pay off your existing debt and another $400 to spend on your living costs.
You may also like: 9 Benefits Of Obtaining a Personal Loan
Cons of refinancing a personal loan
To discover what loan agreements you currently qualify for, you’ll need to do some research.
If you don’t have time to shop around and your original loan is almost paid off, refinancing may not be an option for you.
Here are a few of the potential cons to refinancing:
1. Prepayment penalties
Prepayment penalties are fees you may incur for paying off your current loan ahead of schedule. Some lenders impose prepayment penalties. Others do not.
Check your loan agreement or contact your present lender to see whether prepayment penalties are applicable.
If they do, you’ll be hit with these costs if you refinance and pay off your old loan early.
You may also like: Payday Loans vs Personal Loans, What’s Better For Your Situation
2. Additional fees
Most lenders charge origination fees when they create a new loan for you at the outset of the refinancing process.
Borrowers who do not pay their premiums at the time they are due may be penalized by most lenders.
If you want to refinance your personal loan you have to pay additional application fees, document costs, processing charges, and legal expenses.
Refinancing might be expensive, especially if you’ve previously paid these costs when you took out your old loan.
You’ll be paying them a second time if you refinance.
3. Higher costs
If you refinance, your costs may either go down or up. It all boils down to your new personal loan.
For example, If you take out a loan that has a longer repayment period, you may receive smaller monthly payments but may end up owing more interest.
Before you make a decision, you’ll want to thoroughly explore all of your alternatives.
You may also like: Here’s How Personal Loans Can Impact Your Credit Score
4. Lower credit score
Your lender will frequently request a copy of your credit report when you apply for a new loan. A hard inquiry is what it’s referred to.
Your credit score will temporarily worsen whenever you get a hard inquiry.
However, don’t worry, most hard inquiries only have a short-term impact on your credit score. After two years, they are removed from your credit report entirely.
When should you refinance your personal loan?
Here are 4 situations in which you might want to refinance your personal loan:
1. Your credit score has increased
When you have a good credit score, you’ll find that your loan alternatives are considerably greater.
If your credit score has improved since you took out your previous loan, you’ll be in a stronger position to negotiate.
You may also like: 6 Best Ways People Can Use Personal Loans For
2. Your current loan payments are too high
Even if your credit score is the same, you may choose to refinance because you have a more restricted spending plan than before.
It’s possible that you recently lost some money or took on more debt.
If you refinance, your existing borrowing plan may be changed to accommodate your new spending goal. You’re less likely to fall behind if your loan payments are smaller.
You may also like: Which Document Represents The Borrower’s Promise To Repay The Loan
3. You want a lower interest rate
You can get a lower interest rate if you refinance your personal loan.
If you maintain the same repayment period and make your payments on time, you’ll save money in interest and reduce the loan’s total cost.
To receive a reduced interest rate on your loan, you’ll almost certainly need a higher credit score than you had when you took out the original loan.
You may also like: Your Complete Guide To Share Secured Loan
4. You’ll need more funds.
If you require more cash, refinancing may be the ideal answer.
By refinancing, you can make more money quickly by borrowing less. You can refinance a $1000 loan and repay the original $500 while still having $500 left to spend.
You may have to pay extra costs, in which case your take-home amount will be $500 minus fees.
When should you avoid refinancing a personal loan?
Refinancing a personal loan isn’t always a good choice. If you do decide to refinance, be sure to compare the rates carefully.
You might end up paying far more in new costs and interest in some cases. Here are 2 instances where you should avoid refinancing:
1. Your credit score has dropped
It makes no sense to refinance once your credit score has dropped since the goal of refinancing is to obtain better loan terms.
You will not receive a better loan than the one you already have from most lenders.
You may also like: Business Loan vs Personal Loan: Which One Suits You?
2. The expense is greater than the advantage
Personal loan refinancing has several fees associated with it. These might include additional costs, prepayment penalties, and perhaps increased interest rates.
It’s usually best to keep your current loan if these expenses are greater than the savings you’ll receive from a new loan agreement.
Frequently Asked Questions
If you want to lower your monthly payments, refinancing can be an excellent alternative if interest rates have fallen or are lower than your existing rate.
You’ll save money if you get a lower refinancing rate since it will lower your borrowing cost.
Refinancing will hurt your credit score at first, but it may in fact help in the long run.
Lenders prefer to see a constant lowering in your debt amount and/or monthly payment, so refinancing might assist you to reach that goal. Typically, your score will drop a few points, but it may recover after a few months.
Historically, most experts have advised that if you can lower your interest rate by at least 2%, refinancing is worthwhile.
However, many lenders claim that saving 1% is enough to encourage borrowers to refinance.
Abdulrahman is the founder of Financeive and a financial advisor with +3 experience writing about loans and debts. He took the Nanodegree from Udacity with a degree in Business Administration and had previously finished his bachelor’s degree in Accounting as well.
He is an expert on Personal Finance who knows how to make sure that your finances will not hold anyone back anymore – even if they are struggling with paying off previous debts or just starting their life financially alone as a young adult without much income yet but lots of potential opportunities ahead.
He used to help Individuals and Small Businesses to get loans with low interest and has figured out ways to help most of them to get out of loans Debt.