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    How To Refinance A Personal Loan

    You may have heard that refinancing is a good way to get a grip on your financial situation, but what does refinancing mean? 

    When you take a new loan to pay off your existing personal loan, you essentially refinance your personal loan. This strategy is especially useful for borrowers who can get a new loan with lower interest rates. 

    There are various situations where restructuring personal loans could work.

    When Does Refinancing A Personal Loan Make Sense? 

    What does it mean to refinance a loan and how do you do it sensibly?

    Taking action to retire a more expensive loan is ideal under the following scenarios:

    • Your Credit Score Has Improved - A good score (690-719) or an excellent one (720+) can help you access lower interest rates. When you restructure the debt with lower interest rates, you can save money.
    • You Want To Eliminate Debt Quickly - If you are able to make higher monthly payments, restructuring the debt to a shorter term can be a good option. It will help you save interest costs and pay off the debt faster.
    • You Want Lower Monthly Payments - Lowering the monthly payment will increase your cash flow. You can use the surplus fund to clear higher-interest debts. However, an increase in the repayment term may also see a jump in the interest amount.
    • You Want A Fixed Rate Instead Of Variable Rate - Variable rates often keep borrowers worried about monthly budgeting. Switching to a fixed-rate debt ensures consistency for monthly payments.

    How Refinancing A Personal Loan Affects Your Credit Score

    Can you refinance a personal loan without affecting your credit score

    You will have to approve a hard credit check when you refinance a loan. It can drop your credit score by a few points temporarily, but will not matter in the long run. However, many simultaneous inquiries can drop your score considerably and impact the likelihood of approval.

    How To Refinance A Personal Loan 

    Below we explore how to refinance a personal loan. Resolving your debt issues takes more than just Googling: ‘refinance personal loan’. You should follow these six steps to get going:

    • Identify Your Financial Requirements - You must calculate the exact amount you need to clear your current debt. It is also important to know if there are prepayment penalties.
    • Check Your Credit Score - Your goal is to make sure that the new interest rate is considerably lower. Knowing your credit score gives you an idea of your chances of qualifying for a new loan.
    • Research Rates - It is worth investing your time comparing online lenders and banks to see what rates and terms are available. A lower interest rate is not always a better option if the repayment duration is longer.
    • Ask Lenders If Their Credit Inquiries Will Affect Your Credit Score - When you inquire about rates and terms, it will affect your credit score if a hard credit check is conducted, but not when a soft credit check is made.
    • Explore All The Options - For every rate, you must carefully assess the related factors like terms. Shortlist a few proposals and contact the lenders.
    • Finalize The Best Option - Contact the lender again to discuss the finer points of the new loan, including rates and terms. Carefully assess all terms and conditions before signing on the dotted line.

    Lenders That Allow Refinancing

    While there are many lenders that allow refinancing, here are two to consider:

    • Best Egg - BestEgg offers new loans to borrowers who have existing debts from any other lender. They offer sums ranging from $2,000 to $35,000, with an APR between 5.99% to 29.99%.
    • Upgrade - Enjoy direct payment options to creditors with these loans, besides co-signed and joint debt options. Upgrade offers sums between $1,000 to $35,000 with APRs stretching from 7.99% to 35.97%.

    Pros And Cons Of Refinancing

    When considering a newly structured personal loan, there are pros and cons to keep in mind.

    Pros

    • Access lower interest rates if your credit history is strong
    • Can clear your debts faster if you make higher monthly payments
    • Gain flexibility by extending the payment term

    Cons

    • Additional lender fees can affect your savings and overall cost
    • You might face a prepayment penalty if you pay before the term ends
    • Total interest costs will rise if the payment duration is extended

    Bottom Line

    If you are considering refinancing your personal loans, study all the aspects carefully. You can use an online refinance loan calculator to determine the debt amount and possible repayment costs. Furthermore, discuss your financial situation with lenders to gain a better idea of how to restructure your personal debt effectively.