How to refinance a personal loan
Let’s see how to refinance a personal loan, step by step.
1. Check your loan amount
First, check the exact amount you need to borrow on a new personal loan to pay off your original loan(s). Check the total loan amount owed as well as other significant costs or fees you may incur to repay your original loan and secure your new loan, such as origination fees you may have to pay with your new lender. Origination fees are those charged by a lender to process a new loan application.
2. Check your credit score and credit report
It is important to understand your credit score before refinancing because your credit score directly affects your interest rate. A credit score is a three-digit number that indicates how well you manage your debts. In order to get pre-approved for a loan, your lender may do an informal credit check.
A serious inquiry, on the other hand, occurs when you allow someone to check your credit. If you have poor credit, you may want to improve your credit score before refinancing to get the best possible interest rate on your personal loan refinance.
You can pull your credit report to check your credit history. This is a summary of how you manage credit and to check for any inaccuracies before requesting a refinance. It’s a good idea to correct mistakes before refinancing for the best results.
You are entitled to a free credit report each year from each of the three major reporting companies – Equifax®, Experian™ and TransUnion®. Report any errors to each reporting company before prequalifying for a new loan.
3. Prequalify for a new loan
After checking your credit reports for errors, you can prequalify for a new personal loan. This is considered light credit, which will not affect your credit score. You will need to provide certain information, such as your name, address, income, social security number, and date of birth. Once pre-approved, your lender will share personal loan rates, terms and amounts with you.
4. Compare lenders and loan terms
Carefully compare lenders and loan terms. Banks and other lenders may offer different rates. Check out the various fees associated with refinancing (such as origination fees) and how you might pay for them over the life of your loan.
Note that you may want to contact your current lender to renegotiate the terms of your original loan, especially if you enjoyed working with your current lender.
5. Apply for a new personal loan
Finally, you will need to apply for your new personal loan, which may require you to provide your lender with your bank account information, identification documents, pay stubs, bank statements, etc. Your lender will also ask permission to do a serious credit check, which can impact your credit score. Your new lender will then repay your old loans and you will eventually start repaying your new loan.