Personal loans are a common type of debt held by many Americans. If you’re one of them, you’ll probably want to make sure your loan is as affordable as possible so that you don’t pay more than you need to get out of debt.
One technique that you can sometimes use to lower the cost of your personal loan is to refinance it. Here’s how refinancing a personal loan works, along with some tips for deciding if refinancing a personal loan may be the right choice for you.
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How to refinance a personal loan?
Refinancing a personal loan is a straightforward process. You will find a lender who offers you a new personal loan and you will apply for it. If you get the approval, you will use the proceeds from the new loan to pay off your old loan.
This technique works because you can use the funds from a personal loan to do almost anything you want, including paying off an existing debt. You just need to make sure that the new loan you are applying for will give you enough money to pay off the existing debt that you are hoping to refinance.
Should you refinance a personal loan?
Refinancing a personal loan can be a good idea if you want to change the terms of your existing loan, either to lower your total repayment costs, or to lower your monthly payments, or both.
See, you can’t change your repayment term or interest rate after you’ve applied for a loan from your current lender and signed your loan agreement. But you can shop around for a new loan that charges a lower rate than what you are currently paying.
Lowering your interest rate means that you can save money on the interest you owe your creditors. This means that you can often make the loan repayment more affordable both each month and over time. You can also change the repayment term of your existing personal loan by refinancing. For example, if you have three years left on your current loan, you can opt for a new personal loan with a two-year repayment term or a five or ten year term or whatever period your new lender allows.
A longer repayment period would significantly reduce your monthly payments. Since you would be making a lot more payments, each one could be smaller and you would still pay what you owe.
Unfortunately, extending your repayment period can increase total costs, even, in some cases, if you lower your rate. This happens when you lengthen the time you have to pay the interest. Still, it can sometimes be worth it if you need more wiggle room in your budget and are worried about being able to keep making your monthly payments.
A shorter repayment term, on the other hand, could result in a higher monthly payment than your current loan (or the same monthly payment if you’ve significantly lowered your rate). But it could drastically reduce the total costs over time.
To decide if you should refinance your existing personal loan, shop around with several lenders and get quotes for different loans from new financial institutions. Compare the rate, monthly payment, repayment term and total costs for each option.
If you find a new loan more advantageous than your current loan, there is probably little reason not to refinance. So, you might want to consider going ahead with your new personal loan application.