Are you currently completing the repayment of a personal loan? That’s great. Staying diligent with your payment proves financial responsibility and improves your credit score. However, you might find yourself in need of applying for another loan. What should you do now? Do you apply for a different one or would it be better to refinance your existing loan instead?
What Does It Mean to Refinance a Personal Loan?
What does it mean to refinance a loan, anyway? In a nutshell, to refinance a loan simply means to replace it with a new one. This also means that your payment terms and interest rates are going to be reconsidered and possibly changed according to the refinancing terms provided by the lending company.
It is a good idea if you believe that the new loan amount can meet your current financial needs. Those who are planning to start a new business, for instance, might find the renewed credit limit a blessing. Otherwise, those who don’t really require such a sum may explore other options like payday loans or cash advances instead.
Read Also – What Are The Key Benefits of a Top-up Loan?
The Benefits of Refinancing a Personal Loan
The loan amount that you will receive is not the only advantage of refinancing. Here are some of the other potential perks that you can expect as well:
- There’s a chance to negotiate a lower interest rate. If you have stayed financially responsible since your last loan, then there’s a good chance that your credit score has improved as well. This means that there is a possibility to enjoy a lower interest rate once your loan gets renewed.
- You can enjoy lower monthly payments. Your refinancing will extend the total duration of the loan. For instance, the original loan might have been only 24 months long. Depending on the lender company’s computation method, they could add the total interest rate to the base loan amount then divide it into 24 months of payment.
Let’s say then, that refinancing extends the payment terms to 36 months. This change alone can already significantly decrease the rate of your monthly payment. Not to mention that it could further be reduced thanks to the lower interest rates.
- You can hasten your debt repayment. Suppose you want to do the opposite of extending your loan and you want to make the payment duration shorter instead? That’s great! Fortunately, you have that option when you refinance as well.
The Consequences of Refinancing a Personal Loan
On the other hand, there are a couple of disadvantages that you might want to consider before refinancing as well:
- Your payment terms will get extended. While it can reduce your monthly payment rate as mentioned earlier, the extension of the loan duration also means you’re going to be paying longer than you might have initially planned.
- You might have to pay a higher interest rate in total. A longer loan repayment scheme also means more interest payments that can add up to a higher interest total in the long run.
How Does It Work?
So have you decided to take advantage of your refinancing opportunities? Then here are the steps that you can take in order to start the loan renewal process:
- Check your credit score. As mentioned above, your updated credit score plays a crucial role in the computation of your new interest rate and payment terms. Hence, be sure to check your credit score beforehand to get an idea of where you currently stand.
- Do a preliminary computation. Don’t fill up the application just yet. The next thing that you need to do is figure out the numbers. Look into the total amount that you are potentially going to get, how many months the payment terms are going to be, and how much interest you are going to pay.
There are different online calculators that you can use for a more accurate estimate. Otherwise, you can try to compute it on your own or with the assistance of the lending agent.
This is also a good time to inquire about what will happen to your previous loan. Most refinancing terms pay off the remaining balance of the previous loan by deducting it from your new one.
- Check your eligibility. A lot of people receive a pre-qualification offer from their lending company after meeting a certain number of months of timely payments. This doesn’t guarantee your eligibility, though. It is ideal to check on the actual qualifications first before you get your hopes up.
- Fill out the application. Congratulations, you are finally ready to fill out the application form. Please remember that upon submission, this would result in a hard inquiry on your credit score that can potentially reflect negatively on your credit history. Don’t worry, though, as its impact would naturally diminish over time.
We hope that our quick article has given you an idea of how a personal loan refinancing works, its pros and cons, and its application process. Good luck!