Can you refinance a personal loan?
If you are wondering if you can refinance a personal loan, the short answer is: yes — essentially what you’re doing is taking out a new loan to pay off the old one, says Ted Rossman, senior industry analyst at Bankrate.com. Here’s what you need to know to know if you should refinance a personal loan and, if so, how to refinance a personal loan.
Does refinancing a personal loan make sense to you?
In some cases, the answer is yes, but you should pay close attention to the fees, APR, and loan terms associated with it. Here are a few cases where refinancing makes sense.
- You might get a lower interest rate A refi might make sense if you could get a better interest rate because the loan market is more favorable, your credit score has improved (just note that applying for a personal loan can lower your credit score) and /or your financial situation has improved (like maybe you have paid off other debts). “It might make sense if you could lower your interest rate, but be aware of the new loan origination fee and don’t treat it like a sleight of hand. If you’re just shifting the debt around without making any real progress in paying it down, that’s a red flag,” Rossman says. This is because origination fees can range from around 1-10% of the loan amount, and some lenders may charge a prepayment penalty if you prepay the loan.
- You need to lower your monthly payments to pay for something essential It may also be a good idea to extend the repayment period – and therefore probably reduce your monthly payments – if you need more cash each month for something essential. But remember that lengthening the repayment period will increase the total amount you repay on the loan.
You want to repay your loan faster
If you want to shorten the term of your loan so that you can get out of debt faster, it may be a good idea to choose a shorter loan term at a lower interest rate. Just be sure to factor in the fees to do so to see if it makes sense financially.
What is the best way to refinance a personal loan?
Annie Millerbernd, personal loan expert at NerdWallet, says it’s a good idea to check the lender’s policies early in the process because lenders’ policies vary when it comes to refinancing. Some lenders, like Lightstream and Marcus, only let you refinance with other lenders, while others, like Upgrade and Discover, let you use them or use another lender to refinance. By reviewing your lender’s policy, you will know what you can and cannot do. And while you’re at it, check your current balance, loan terms, and other details so you know exactly what you have.
Once you’ve done that, follow these steps:
- Prequalification with multiple lenders Go anywhere from three to five quotes from lenders. “Pre-qualify for your new loan to compare the rate and monthly payment to your current loan to be sure refinancing will save you money,” says Millerbernd. But don’t worry, prequalification doesn’t affect your credit score. Instead, it allows borrowers to compare and contrast a new loan with their existing loan.
- Do an apples to apples comparison between lenders Consider not just APR, but also fees and loan terms when comparing different offers, experts say. Also be sure to ask about ways to get discounts.
Repay the old loan with the new loan
Typically, you can apply for the second loan and receive a decision and sometimes even the funds within days. “Once you’re approved for the new loan, the lender may offer to pay off the old one for you, or else you must do so when you receive the funds,” says Millerbernd. When this happens, also check that your original loan account is closed.
What are the alternatives to refinancing a personal loan?
Matt Schulz, chief credit analyst at LendingTree, says you might want to consider renegotiating your current loan rather than refinancing it. “You may be able to negotiate better terms, such as a lower monthly payment or a lower interest rate, although there’s no guarantee they’ll work with you,” says Schulz.
Another option, if you have good credit, is that you can refinance a personal loan with a zero percent balance transfer credit card. “Many credit cards offer 0% interest for up to 21 months on transferred balances, although you’ll typically have to pay a one-time 3-5% fee to complete the transfer,” says Schulz. Just make sure you can pay off the debt before the interest-free period ends, after which rates will likely skyrocket.