Refinancing your personal loan? Here are 8 important steps to follow

Refinancing a personal loan involves substituting your current loan with a new one, obtained either from your current lender or a different one. The funds from the new loan are utilised to settle the existing loan, and subsequent monthly payments are directed towards the new arrangement.

The rationale for refinancing is most compelling when the new loan offers a lower interest rate or more favourable monthly payments compared to your current loan. This process entails obtaining a new loan to settle your current personal loan. This can be advantageous if the new terms are more favourable, including lower interest rates or improved conditions.

• Reduced interest rate: This could result in substantial savings on interest payments throughout the loan’s duration.
• Extended repayment period: While this can reduce monthly payments, it’s important to note that it may lead to higher overall interest payments.
• Abbreviated repayment duration: Opting for a shorter term enables faster debt settlement and interest savings, albeit necessitating higher monthly payments.

Nevertheless, refinancing may not be the optimal choice in every situation. Here are some factors to take into account:

• Expenses linked to refinancing: New loan arrangements may involve origination fees, application fees, and additional closing costs. Ensure that the potential savings surpass these expenses.
• Effect on your credit score: The process of applying for a new loan can lead to a temporary decline in your credit score, attributed to a hard inquiry.

Certain lenders may restrict the option to refinance their existing loans, yet they might be amenable to refinancing loans obtained from other lenders. Before proceeding with another lender, it is essential to inquire about your current lender’s policy regarding the refinancing of existing loans. Furthermore, it is crucial to compare rates and terms from various lenders, including your current one, to guarantee that you secure the most favourable deal when refinancing your loan.

Frequently Asked Questions (FAQs)

Q. Which steps must you consider for refinancing your personal loan?

Obtaining refinancing for your personal loan might pose challenges, especially if you are currently burdened by substantial debt. Refinancing a personal loan encompasses the following steps:

• Evaluate your credit score and review your credit report: Before initiating the refinancing process, appraise your creditworthiness. Obtain your credit report to identify any errors and confirm a positive credit score, as it plays a crucial role in determining the terms you will be presented with.
• Perform the calculations: Determine your current personal loan balance, including any remaining amount and potential prepayment penalties. This calculation assists in establishing the appropriate refinancing loan amount.
• Explore options and compare lenders: Look beyond your current lender and research rates, terms, and fees from various sources such as online lenders, banks, and credit unions. Leverage online tools or seek advice from a financial advisor to streamline this comparison process.
• Pre-qualify for offers: Many lenders provide pre-qualification options involving a soft credit check, which has no impact on your credit score. This allows you to review potential rates and terms without affecting your credit.
• Select the optimal offer: Thoroughly evaluate the pre-qualification offers, considering not only the interest rate but also the loan term, origination fees, and other associated expenses. Choose the offer that offers the most significant advantages while aligning with your financial goals and budget.
• Submit the loan application: Once a lender is chosen, submit a formal application along with the required documentation, such as proof of income, employment verification, and bank statements.
• Settle the old loan: After approval of the new loan, the lender typically pays off your existing personal loan directly. However, it’s advisable to confirm with both lenders to ensure the closure of the old loan and halt any further payments.
• Commence payments on the new loan: Congratulations on successfully refinancing your personal loan. Prioritise timely payments on the new loan to maintain a favourable credit score and avoid potential penalties.

Q. Which credit score range do lenders typically consider for personal loans?

Lenders typically evaluate credit scores within a spectrum of 300 to 850. Although specific requirements can vary among lenders, a credit score of 650 or higher is generally deemed good and could enhance your likelihood of securing approval for a personal loan.

Q. Is it possible to get a personal loan with a low credit score?

Securing a personal loan with a low credit score is feasible, but it could pose more difficulties. While some lenders may consider individuals with lower credit scores, the terms of the loan, including interest rates and loan amounts, may not be as advantageous compared to borrowers with higher credit scores.

Q. Does your credit score impact your personal loan interest rates?

The interest rate provided by lenders is directly correlated with your credit score. Generally, a higher credit score results in a lower interest rate, leading to potential savings on the overall borrowing cost.

Q. How can you improve your credit score before applying for a personal loan?

Enhancing your credit score is achievable through the adoption of responsible financial practices. This involves timely bill payments, decreasing credit card balances, refraining from new credit inquiries, and rectifying any errors present on your credit report.