Some people ponder the question as to why anyone would want to refinance a loan. It’s almost like starting the loan process from scratch. Looking at that from the outside-in, it doesn’t seem to make much sense, particularly if you’ve gotten through much of the interest on the loan.

The option of refinancing is something that takes careful consideration, weighing the pros and cons as they fit your particular financial circumstances. It won’t suit everyone’s situation, with lenders assessing individual creditworthiness, personal finances, and debt status to decide the logistics of a refinance structure.

This is the same way an original personal loan approval is decided. If your profile from the time you took the existing loan has remained consistent, with no significant improvements, and the market rates are relatively the same or higher, a refinance wouldn’t make sense and would likely be rejected.

However, as is true in most cases, refinances result in considerable savings not only with the potential for a lower interest rate but also by adjusting the term, obtaining more favorable terms and conditions, or possibly changing from a variable to a fixed rate.  

The slightest upfront cost reductions can result in substantial savings over the loan’s life when the balance is paid in full.

How To Refinance a Personal Loan

When refinancing, a borrower takes a new debt and uses the funds from that loan to pay the balance of an existing debt. As the borrower, you should do due diligence to ensure the benefits outweigh the downsides. 

The new product should offer a comparable or lower rate and better terms and conditions, essentially it should improve your financial situation. The product should have minimal fees and charges for the loan to be worthwhile. Please visit besterefinansiering.no to learn details on refinancing loans.

While you can work with the same loan provider, it’s wise to compare many lenders to get the most competitive offer. That’s especially true if you have made significant improvements with your profile. 

You’ll have considerable negotiating power to find the best rate and avoid exorbitant fees and charges that can sometimes be associated with personal loan products, like prepayment penalties and origination fees. Here are some tips on how to refinance a personal loan.

The first step is figuring out if a refinanced personal loan is right for you

One of the tools helpful when discerning if a refinance is right for you is a personal loan calculator to assess the overall cost, including potential fees and charges. For instance, if your existing product has a prepayment penalty and the new loan will require an origination fee, the charges can be extreme.

It’s important to see if you’ll save enough over the long-term to justify these upfront costs with a refinance.

Another part of this step is reviewing your credit profile and score to ensure you qualify for a competitive rate and more favorable terms and conditions from that of your existing product. 

When trying to improve credit to apply for a refinance, any discrepancies on your profile should be disputed with the credit bureaus for correction, collections should be validated as your debt and satisfied, and outstanding debt should be caught up and consistently paid on time to show the best financial habits and boost your credit score.

What method do you want to use to refinance your personal loan

The two most common methods for refinancing personal debt are either through a balance transfer credit card or with a personal loan. These are distinctly differently but each offers unique perks and downsides.

·       Personal loan 

With a personal loan, rates can be considerably lower than credit cards, but lenders base the loan structure primarily on creditworthiness. The higher your score, the lower the interest rate and the more favorable the loan terms. 

These products offer a fixed rate structure with equal monthly installments for a predetermined period.

·       Balance transfer card

A balance transfer card comes with zero interest for a designated introductory period, which can be roughly 18 months. During that time, any payment made goes directly toward reducing the balance. 

However, if you don’t fully satisfy the balance before the promotion period ends, the standard credit card rates kick in immediately on the remaining balance. That can leave you in more debt than you had with the existing personal loan. 

Another consideration with this option is the balance transfer fees that can sometimes range as high as 5 percent. You’ll need to consider the amount you’ll save and whether you can pay the full balance before the introductory period is over against these transfer charges before choosing this option.

Compare lenders

You can use the same loan provider when refinancing, but it shouldn’t be the only lender you review before committing. You’ll want to compare as many lending companies as possible to get the most competitive offers, especially if your credit allows you to negotiate for low rates and favorable terms and conditions.

Only some lenders charge prepayment penalties and origination fees. If you can avoid these charges, it’s wise to try to do so since they can be extreme. Some refinances fall through because the savings just don’t justify the expense created by the fees.

Before comparing different providers, shop for those who allow borrowers to prequalify. When prequalified by a lending agency, this counts as only a soft credit pull, leaving little damage to your credit. 

It will offer many important details on your eligibility with each lender, including an outline of the prospective interest and terms and conditions. When it comes to time for approval, you’ll have this information to attach alongside your other loan documents for a speedier application process.

The primary benefit of prequalifying is you’ll have insight into how the refinance will compare to your existing loan, whether the process makes sense in your particular financial situation, and whether you should move forward now or stay with your current product a bit longer.

Apply

When you find the most competitive offer, it’s time to formally apply. The lender will follow the same process as was used with the existing loan. That will include a hard credit pull and requesting personal, professional, and financial documentation in order to process the paperwork.

The lender can repay the existing balance on your behalf, but you will need to get an exact loan pay off amount from the current loan provider that will bring your account to a zero balance and close it.

Once the debt has been satisfied, the lender should send the final statement and account closure correspondence to you to confirm the balance has been satisfied.

Final Thought

Refinancing a personal loan is a big decision that should be taken with careful consideration, weighing the pros and cons as they pertain to your financial circumstances and putting in much effort prequalifying and comparing varied lenders to get competitive rates and better terms and conditions compared to the existing product. Click for advice on whether refinancing a personal loan is a good idea.

The option isn’t right for everyone, primarily depending on your creditworthiness. What’s your credit score? Where is your rate now? Will you be able to save any money by taking this step? 

But it is worth looking into, especially if your existing loan has become expensive. What’s the adage that fits here, “Nothing beats a failure but a try.” Give it a try.