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When You Should Refinance Your Personal Loan

When to refinance a personal loan? It’s a question that many people ask themselves and it can be difficult to answer.

Refinancing is a good option (especially if you have a high-interest loan) and there are no hard and fast rules for deciding whether or not to go ahead.

But there are some things you should be aware of which will hopefully help you make the right decision for your own personal circumstances.

When refinancing your personal loan is a good idea

When your credit score rises and you’ve paid off other debts.

Why? Because borrowers with excellent or good credit and a low debt-to-income ratio get the best personal loan rates.

If you’ve made on-time loan payments and your credit score has improved, you may save money by taking out a new loan with a reduced interest rate and refinancing.

You require lower monthly installments. Refinancing can extend your repayment period, lowering your monthly payment while allowing you to spend more money in other areas of your life.

You may spend the excess cash on higher-interest debts or savings.

Do you wish to pay your debt off faster? If you can afford to pay larger monthly installments, you may refinance your personal loan to a less expensive loan and save money on overall interest costs while also clearing the debt faster.

This plan works best if your existing loan has a long payback period and you can get a higher interest rate.

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Advantages and disadvantages of refinancing personal loans

Advantages of refinancing:

1. You’ll get a lower APR

If your credit score, income, or debt-to-income ratio has improved since you took out the original loan and refinanced it, you might be eligible for a reduced annual percentage interest rate on the new loan.

2. Saving money on monthly installments

Refinancing may reduce the amount you pay each month by extending the length of the loan.

For example, if you’re having difficulties repaying a loan with an amortization period of 36 months, refinancing into a longer-term may help you save money by extending the time it takes to pay off the debt.

Get The Loan ​Comparison Calculator

    It allows you to compare different loan scenarios. By taking 2 different loans, then manipulate it, extra payment per month, time to pay off, and more.

    After that it will show you the difference between accumulated interest, days between payoff dates, and things along those lines

    Keep in mind: that lengthening the term of the loan this way will also result in a higher interest rate.

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    3. Shorter repayment period

    If your financial circumstances have changed, from a longer repayment period (like 36 months) to a shorter repayment period (like 24 months), you may pay off your loan faster, get out of debt sooner, and potentially reduce the amount of interest that accrues.

    Disadvantages of refinancing

    1. A longer period of time results in a greater interest

    Although the appeal of lower monthly payments might be tempting, refinancing to a longer repayment period raises your total interest charges and extends your debt burden.

    If you’re having trouble making your installments, your lender may allow you to temporarily stop or postpone them.

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    2. Origination fees

    When you refinance with the same lender, it’s important to know that they may charge an origination fee. This can range from 1% – to 10%.

    If you have this surcharge, double-check to see if the amount you’ll earn after the lender takes a cut is enough to fully refinance your loan.

    How does refinancing a personal loan affect your credit score?

    A hard credit check is performed to see if you qualify

    When you apply for a refinance loan, lenders will conduct a thorough credit check and scores evaluation.

    You may see a small dip in your credit scores if you do not pay off the balance on time.

    When looking for a refinance loan and applying with numerous lenders, try to submit your applications within a 14-day time frame.

    Many credit scoring algorithms take into account numerous queries in a 14-day period as one inquiry, which will help to reduce the damage to your credit scores.

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    Closing the transaction

    After the refinancing is completed, your old loan will be terminated.

    Loans to pay off debt can be viewed as negative under some credit scoring systems, in ways that home and automobile loans are not.

    The length of your credit accounts is also taken into account by credit-scoring algorithms.

    Some credit scoring algorithms include the previous loan when calculating the average age of your accounts, while others don’t (potentially lowering the average age for those who do).

    The length of your credit history accounts for 15% of your FICO® credit score, according to FICO.

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    New credit

    If you’ve recently taken out other loans or credit and your credit scores have dropped, it’s possible that they’ll drop further.

    Many new accounts in a short period of time are seen as a greater risk by credit-scoring algorithms.

    Frequently Asked Questions

    When should you refinance a loan?

    When you can cut your interest rate by at least 2%, you should consider refinancing.

    Many lenders, on the other hand, believe that offering 1% in savings is enough of an incentive to refinance.

    Is it good to refinance a personal loan?

    If interest rates have declined or are lower than your current rate, or if you must extend your repayment term, refinancing might be a smart alternative.

    A lower refinancing rate lowers your borrowing cost, so you’ll pay less on your personal loan in total.

    When can you refinance a loan?

    There is rarely a waiting period for refinancing. In many circumstances, you won’t have to wait 6 months before taking out another loan.

    However, if you’re taking cash–out, you must wait 6 months after your most recent closing (usually 180 days) to refinance.