Refinancing a loan entails taking out a new personal loan and using the funds to pay off the old loan. Personal loans can be a great way to finance goals like home improvements or pay down credit card debt but you may be able to save even more money by refinancing your loan. You can apply for a personal loan and use the funds for all kinds of financial requirements.
In some cases, a lender may offer loans only for a specific purpose such as medical bills or home improvement, in which case you may not be able to use the funds for refinancing. You can save money on your new loan interest rate by refinancing your loan.
When to refinance your loan?
- Have a good credit score: One of the best ways to qualify for a lower interest rate on your loan is by improving your CIBIL score. If your score has seen a jump since you initially took out your loan, this could be a good reason to refinance the loan.
- Switching up your rate type: Having a variable APR on a loan makes it difficult to plan for your monthly payments. Not only that, but you might also see an upward trend that ends up costing you more. By refinancing your loan, you can switch from a variable interest rate to a fixed interest rate so you can enjoy consistent payment amounts each month.
- Avoiding a balloon payment: Some loans may come with a balloon payment, this requires you to make a much larger payment towards your loan. Hence it is best to refinance and avoid this style of loan.
How to refinance your loan?
- Figure out how much money is required.
Before you shop for quotes, it’s best to find out the exact amount of money that is to be paid off your current loan. You can find this information by logging into your account or you can simply get in contact with your lender. Also, inquire if there are any prepayment penalties that might outweigh the benefits of refinancing.
- Check your credit score and credit report
Before you consider refinancing your loan, you’ll need to check whether you qualify for a lower rate on loan. If the new interest rate isn’t significantly lower, it may not be worth it to refinance. Alternatively, check your own credit score to get an idea of whether or not it has improved.
- Shop for rates and terms with banks and online lenders.
You need to do a lot of research work before refinancing your loans. You need to look up different banks and lenders and what their requirements are. Getting a new loan with a lower interest rate isn’t necessarily better if you’re paying it off for a longer time. One more issue with refinancing is the temptation to extend the maturity of the new loan past the maturity of the current loan. Then, even if you get a lower interest rate, you can end up paying more in total interest expenses. With the help of a personal loan emi calculator, you can calculate the rate offered by the lenders.
- The effect of the loan interest rate on your credit score.
Some lenders might let you shop for interest rates on a loan without it affecting your credit score until you actually close on the new loan. While closing on a new loan, your credit score can take a small hit. The dip in your credit score is temporary, lasting only a year. The credit inquiry itself is listed on your credit report for two years but doesn’t hurt your score the entire time.
- Compare refinance rates
Carrying out a good research will help you make better decisions towards refinancing your personal loan. You need to refinance your loan interest rates and take notes for every rate presented and compare all the key features and interest rates. After analyzing your research and discussing the same with your lender you can decide what’s best for you.
- Get in contact with the lender
If you like the choices your lender offers, you can contact them and further discuss the interest rates on loan. There’s a lot of fine print, and you want to make sure your lender guides you through it all. Before finalizing your decision, have them provide the pros and cons of each interest rate. Also, it’s a good practice to go through your loan agreement and check with all the terms and conditions carefully before you sign up for anything.
Once you’ve completed your research, acquired all the details, and talked to lenders, you can see the big picture, and determine whether refinancing the personal loan even makes sense. Also, by checking your credit report and score, you’ll not only know what lenders see before they consider you for a loan but also avoid any unnecessary surprises affecting your ability to make the best use of loan terms.
