You may be thinking of refinancing your personal loan to fetch low interest rates and reduce your liabilities. However, there are drawbacks too. It may affect your credit score, and choosing a longer term may increase the interest liabilities even more. It lowers your monthly repayments, but eventually you pay more on the loan.
Moreover, your credit score suffers a temporary dip as you refinance your personal loan. It is because the loan company conducts a hard search to analyse the affordability. Thus, refinancing a loan requires understanding terms, implications and the right time to do so. The blog details everything regarding refinancing a personal loan.
What does refinancing a personal loan mean?
Refinancing implies taking a fresh loan to repay the current personal loan at a lower interest rate and overall costs. You can consider one if your financial situation, income, and circumstances have improved since you took the loan. It is also ideal to consider refinancing if you struggle to repay the current loan and want a more manageable repayment schedule.
Debt refinancing differs from debt consolidation: In debt refinancing, you can refinance only one debt, whereas in debt consolidation, you merge multiple payments to secure better interest rates and terms.
When should you refinance a personal loan?
Refinancing a personal loan makes sense if our present financial circumstances have changed. For example, if you applied for a personal loan with bad credit and now your credit and income have improved, you may qualify for a lower rate. Here are some reasons to refinance a personal loan:
1. Lower your monthly instalments
You can refinance your loan to save money on the instalments that you pay monthly. You may want an extended repayment term manage your loan comfortably. Under the new agreement, you pay less each month.
However, choose the loan repayment term wisely; picking a longer one may make you pay extra interest. To decide the term, you can use a personal loan calculator. It may help you know the approximate amount, and you can choose the term accordingly.
2. Free up the loan guarantor
However, it is not possible to remove the guarantor on the loan; you may enquire when your situation improves. Usually, it is possible to remove the guarantor if the concerned person dies. You must clear the dues individually in this scenario. However, if your situation improves and you want to fetch better terms to pay the loan yourself, you may consider refinancing.
3. Want to pay off the loan quickly
You can refinance a personal loan to a shorter repayment tenure. It is ideal if your income has improved and you want to clear the debts quickly. It helps you save a whopping amount of money on the loan amount. You can have better control over finances.
4. Need to borrow more money
If you need a higher amount, refinance for a bigger loan. It helps you pay the existing loan and use the remaining amount for other priority life goals.
How should you refinance a personal loan?
You can fetch new terms on your personal loan by following these steps. It may help you :
- Helps you save money on interest rates
- Reduces monthly payments
- Helps you manage payments more smoothly
Here is how to refinance a personal loan:
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Step 1: Understand the current situation
Check how your current loan agreement looks. What do you struggle with, and how refinancing may help you deal with that? Use a loan calculator designed for refinancing. It may help you understand how much you save or whether you should consider one at all. Proceed if you can save a good lump sum.
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Step 2: Compare and check the best interest
Once you understand your current liabilities, check and explore the interest rates you may qualify for on your current loan. You may compare options across the best loan companies. Check the representative APR, total loan costs, and Interest costs.
Don’t forget to compare the missed payment and any loan fees. Also, check the estimated monthly costs and origination fee; it may be as high as 10%.
Here is a representative example of how refinancing a personal loan works. For example, you want to refinance a loan by taking a new personal loan for the self-employed. You have £20,000 in debt from buying software. However, delayed client payments make it challenging for you to pay the loan on time. Here is how refinancing may help:
| Parameters | Current loan | New Loan |
| Amount | £20000 | £20000 |
| APR | 15% | 9% |
| Term | 5 years | 5 years |
| Monthly repayment | £495 | £413 |
| Total money repaid | £29,700 over 5 years | £24,780 over 5 years |
| Total interest paid | £9,700 | £4,780 |
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Step 3: Submit a new loan application
Once you find the best match, apply with the new loan provider by understanding the requirements. Acknowledge the documentation requirement and make sure that the new loan agreement helps you save money.
The loan company may run a detailed credit check, which drops your credit rating temporarily. Generally, the credit score drops by 5-10% after the hard credit assessment. It may recover if you continue to repay the debt consistently.
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Step 4: Read the terms and consent
One must go through the contents of the loan agreement before moving forward. Compare it with the old agreement and check whether you sincerely save money. Identify and enquire about the confusing terms and hidden costs (if any). Ensure you understand the liabilities and your responsibilities before providing your consent via email.
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Step 5- Use the loan to pay the existing debt
You get the money quickly after you provide your consent to the agreement. Lastly, repay according to the new loan and terms. You may need to shift and reschedule direct debits. Make sure to set it right, or else you may miss a payment.
Note: You ought to pay the late fees if you don’t pay on time. Missing a payment for over 30 days can significantly affect your credit rating. It may fall by 50-100 points. It is thus ideal to apply with experts like Figurallloans in the UK. It shares expertise in helping individuals negotiate a better repayment schedule in case of difficulty.
What to check when refinancing a personal loan?
Here are certain aspects to check when refinancing a personal loan:
- Early repayment charges: Do you need to pay penalties to pay the dues early?
- Impact on credit score: Hard searches may hurt your credit score.
- Loan term length: Check by when you can repay the dues comfortably. Don’t choose a longer term as it increases interest costs.
- Credit score requirement: Identify how you can improve your credit score and match the requirement
- Check the new APR: Make sure the new APR that you get is less than the previous loan agreement.
Bottom line
Thus, it is ideal to refinance a personal loan to better manage your loan by securing a lower interest rate and lower monthly payments. Check the current loan and what refinancing may change about it. If the loan helps you clear the dues early without affecting your basic essential expenses, refinancing is a good option. However, if you don’t see any potential difference in the terms, then you may avoid it.