In fact, saving money by refinancing high-interest debt into lower-interest debt could be the reason you wanted a personal loan in the first place. That’s one of the main reasons people seek personal loans, according to a Credit Karma study.
But what if you’d like to get a lower interest rate for an existing personal loan — and potentially save money — or decrease the number or amount of your monthly payments? Does it make sense to refinance your personal loan?
In some situations, refinancing a personal loan might make sense for you. But you should first examine the pros and cons of refinancing. Those include whether you’ll actually end up saving money by refinancing the loan and how your credit can play into the decision. You also need to consider the suggested steps for getting the lowest interest rate and lowest fees available for you.
When you refinance a personal loan, you’re replacing the existing loan with a new one. The funds from the new loan are used to pay off the old one. Refinancing a personal loan offers several potential advantages:
The opportunity to get a lower interest rate than what you’re paying on your current loan. If your credit has improved since you first took out your personal loan, you may be able to qualify for a better rate on a new loan. A lower interest rate could save you money on the overall cost of the loan.
Decreasing the dollar amount of your monthly payments by stretching out the length of the loan. For example, if you’re struggling to make payments with a loan term of 36 months, refinancing into 48 months could reduce your monthly payment. Keep in mind that extending the term of the loan can also mean paying more interest in the long run.
Cutting the number of payments by switching from a longer repayment period (like 36 months) to a shorter repayment period (like 24 months). If your financial situation has changed and you can afford to pay more per month to pay off your loan faster, shortening the loan term could help you get rid of the debt sooner.
Just like when you’re looking for a credit card or a mortgage, you should shop around when seeking to refinance a personal loan. This way, you can help ensure you’re getting the lowest interest rate you can qualify for, along with the most-favorable payoff period and manageable monthly payments.
Tip: Be sure to ask the lender that handles your existing personal loan whether it could refinance the loan. Or consider shopping for personal loans online through websites like Credit Karma.
In 2017, the Consumer Financial Protection Bureau received 4,160 consumer complaints related to installment loans. Some of those consumers reported being told conflicting information about documents and other application requirements. Meanwhile, other consumers complained about being hit with interest charges or fees that they hadn’t expected.
To help avoid being surprised by fees or terms, do some digging. With a little research online, you can find reviews from the Better Business Bureau and other sources that might help you consider which lenders you want to do business with.
Before you decide on the right offer to refinance your loan, check your credit scores so that you know where you stand. Typically, people with higher credit scores are more likely to qualify for lower interest rates. And lower credit scores generally equate to higher interest rates.
Interest rates on personal loans can vary widely. A July 2018 search of personal loans for refinancing offered on Credit Karma showed interest rates ranging from 5.99% to 35.99%. One lender, Best Egg®, stated that FICO® credit scores of at least 700 and minimum individual income of $100,000 a year was required to qualify its lowest interest rate (5.99%) for a personal loan.
Prosper®, another provider of personal loans, explains that the interest rate it charges a customer depends on factors like credit scores and credit history, as well as the loan amount, loan repayment period and a host of other factors.
An online loan calculator (or your own calculator) can help you determine how extra costs like origination fees and prepayment penalties can affect the cost of repaying the refinanced loan.
As we mentioned earlier, these fees can increase the total cost of a loan so that even a refinanced loan with a lower interest rate might mean you end up paying more to borrow money in the long run.
Prequalifying — a less formal assessment of your creditworthiness — doesn’t guarantee you’ll get a personal loan to refinance your existing one. But it could help you get an idea of your ability to qualify for a loan before you go through an application — and before you ding your credit with a hard inquiry on your credit reports. It can also help you understand if you’ll be able to borrow enough to pay off your existing loan and what interest rate you might get.