A personal loan can be extremely useful for many reasons. If you wish to renovate your home, go on a trip, pay for your marriage expenses, or consolidate your debt, a personal loan is ideal. However, there might be a few instances where it makes sense to refinance a personal loan.
Now, what does it mean to refinance a personal loan? By refinancing a personal loan, you can replace your existing loan with a new loan that has a lower interest rate or a revised timeline for repayment. Personal loan refinancing can be helpful if the interest rates have dropped since you took the loan or if you need some more time to repay the existing one.
In such cases, you would want to refinance a personal loan, since it allows you to reduce the overall cost of borrowing the personal loan. Thereby ensuring that you pay less. Also, a longer timeframe or lower monthly payments might make things a tad easier if you are a bit tight on your budget due to other commitments.
What Does It Mean To Refinance a Personal Loan?
Let us understand what it means to refinance a personal loan. When you refinance a personal loan, you replace the existing loan with a new one. You can either borrow from the same lender or opt for a different lender. The new loan will help you pay off the existing loan.
And once that process is complete, you can continue repaying the new loan you just opted for.
There can be a few reasons to refinance a personal loan. However, a better interest rate should ideally be the primary reason for it.
During the personal loan refinancing phase, some individuals choose to borrow a bit more to cover additional expenses.
When Does it Make Sense to Refinance a Personal Loan?
The entire theme behind personal loan refinancing is to help you save money. Now that you know what refinancing a personal loan is, let us check some reasons why it makes sense. The following are some of the reasons why it makes a lot of sense to refinance the loan:
Avoid Balloon Payment
Some personal loans come with a balloon payment when it comes to repaying the loan. In a balloon payment, you end up paying a
much higher amount towards the end of the loan tenure. By refinancing in advance, you can skip this kind of payment.
Enhanced Credit Score
There is a possibility that your credit score has improved since you took the personal loan. A better credit score can help you secure a loan with lower interest rates. This can be a good reason to refinance the loan.
Lower Monthly Payments
You can choose to refinance the loan if your income happens to decrease for any reason, temporary or permanent. You can refinance the loan to something with a longer repayment schedule, thereby reducing the monthly repayment amount. It might now save you money in the long run but can help you cope with the change in income.
Change Your Interest Type
One of the things to consider before refinancing is the interest type of the loan. Having a floating rate on your loan can make it a tad difficult to plan things monthly. You can opt for personal loan refinancing if there is an option to change the interest type to fixed.
Faster Repayment
You might consider personal loan refinancing if your income has increased significantly. This would mean that you can afford larger monthly payments and, thus, be able to pay the loan off in a shorter period. Paying the loan off earlier will help you save money.
Additional Fees
Refinancing a personal loan might come with a few additional fees. For example, you might have to pay application, processing, or prepayment fees with your existing lender. Ensure that you are aware of all these charges before refinancing the loan.
Should You Always Refinance A Personal Loan?
If you wonder if refinancing a personal loan is a good idea, it might not always be the best decision. There are things to consider before refinancing. Here are some cases when you would not want to refinance the loan.
End of The Tunnel
Refinancing might not be a good idea if you are close to the end of the repayment schedule for the existing loan. It will only extend the timeline of repayment and effectively increase your overall expenses.
Lower Loan Balance
People with a low balance on their existing loans might want to skip refinancing. The fees related to foreclosure or processing fees for the new loan might not make it a viable solution to refinance.
Higher Interest Rate
You might want to reconsider refinancing if you cannot secure a personal loan with lower interest rates. It would only make sense if you cannot afford the payments and need to lower the monthly payments.
How To Refinance Personal Loan?
Here is how you can refinance a personal loan.
Amount Needed:
The first step involves figuring out how much money you need to repay the existing loan. Also, if your current lender charges prepayment fees, knowing these will help you deduce the amount needed to close the existing loan.
Credit Score:
A quick look at your credit score can help determine if you are eligible for a loan with lower interest rates.
Shop Around:
You must do some research and shop around with different vendors. This will help you secure a loan that is low on interest or offers better terms.
Current Lender:
It might be a good idea to speak with your current lender about refinancing the loan as well since you have a history with them.
Apply for New Loan
The last step would be to apply for the new loan, close the existing loan and continue with repayment for the new loan.
Wrapping It Up
Before deciding, you should know “what is refinancing a personal loan”. The above are some of the things to consider before refinancing a personal loan. It might be a smart move if the refinancing helps you save money, lowers the interest rate, or lowers the monthly payments. If you are considering that option, you could consider opting for a personal loan from trusted companies like Tata Capital as well.
23 June 2023
6 mins read
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