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
- Advantages and disadvantages of refinancing personal loans
- Get The Loan Comparison Calculator
- How does refinancing a personal loan affect your credit score?
- Frequently Asked Questions
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.
You may also like: Are Personal Loans Worth It In 2022?
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.
Keep in mind: that lengthening the term of the loan this way will also result in a higher interest rate.
You may also like: Should I Get a Personal Loan to Pay Off Credit Card Debt
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.
You may also like: Business Loan vs Personal Loan: Which One Suits You?
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.
You may also like: 6 Best Ways People Can Use Personal Loans For
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.
You may also like: What is a loan maturity date? And What Will Happens If You Don’t Pay?
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 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.
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.
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.
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.