Can you refinance a personal loan?

Can you refinance a personal loan?

If the terms of your personal loan no longer fit your budget or financial goals, refinancing could help. OneMain Financial broke down exactly what it means to refinance a personal loan, why you might want to refinance and how to move forward if you decide refinancing is the right choice for you.

What does it mean to refinance a personal loan?

When you refinance a personal loan, you take out a new loan and use the funds to pay off your existing loan. The new loan replaces the old loan, ideally with new loan terms that work better for you. Some lenders use the phrase “loan renewal” to describe the refinance process.

Reasons to refinance a personal loan

There are many reasons you might consider refinancing a personal loan:

• To get a lower interest rate
• To change your monthly payment amount
• To change your repayment timeline
• To borrow more money

Refinancing may be beneficial — but not in every case. Always compare terms closely to understand the long-term impacts before borrowing.

What are the pros and cons of refinancing a personal loan?

Before moving forward, take time to understand the full impact of refinancing.

Pros

Refinancing a personal loan may offer many benefits, such as:

• Potential savings: If your new loan offers a lower interest rate, you could save on monthly payments. If you currently have a variable interest rate, refinancing into a fixed interest rate could also make your monthly payments more predictable and easier to budget for.
• Terms that better match your goals: You may be able to refinance with a loan that has a shorter or longer repayment period. A longer repayment period could come with a lower monthly payment. A shorter repayment period may increase your monthly payments, but helps you pay off your balance sooner.
• More financial flexibility: If you’re able to renew or refinance your loan to a loan with a higher amount, your current loan will be paid off, and any remaining cash is yours to use for just about anything you need to take care of.

Cons

Before committing to a new loan, you'll also need to consider the potential drawbacks:

• Possible extra fees: Before refinancing your personal loan, be sure to read the fine print about any fees you may be charged by your current lender and new lender. These could include both origination fees for the new loan and prepayment penalties for paying off your existing loan early.
• Potentially higher interest costs: Extending your payments over a longer term may lower your monthly payments, but you will likely pay more interest over the life of your loan.
• More time in debt: Keep in mind that if your refinance includes a longer loan term, you’ll ultimately wind up staying in debt longer.

How do you refinance a personal loan?

Refinancing involves applying for a new loan, so the process may seem familiar if you have recently applied for a personal loan. The main difference is how the new funds are used.

While the specific method may vary a little by lender, you typically follow the same steps in order to refinance a personal loan:

1. Check your credit

Two big factors in getting approved for refinancing a personal loan are your creditworthiness and a history of timely payments on other debts, including your current loan. Creditworthiness is a lender’s assessment of how likely you are to repay what you borrow, based on factors like your income, credit score and credit report.

Checking your credit, both your score and your report, can help you avoid surprises and gives you an opportunity to dispute any errors before you start the loan application process.

2. Check your payoff balance and decide how much money to request

Applying for any loan starts with figuring out how much money you need. Do you simply want to change the terms of your loan, or do you want to borrow more money?

In either case, you’ll need to know the current balance of your existing loan so you can pay it off in full. Your current lender can provide a 10-day payoff letter, which shows the total amount of money you need to fully pay off a loan within 10 days, including fees and interest. You may be able to request the letter yourself, but your new lender often asks on your behalf when you’re refinancing.

When deciding how much money to request to borrow, you’ll also want to factor in any possible associated fees, such as a prepayment fee from your current lender and an origination fee from your new lender.

It’s important to know that the lender may not agree to lend you the full amount you request. The lender reviews your application and determines how much money (if any) you may be approved to borrow.

3. Prequalify and compare offers

You might choose to prequalify with multiple lenders to explore the terms that may be available to you.

Consider creating a side-by-side list of prequalified offers to compare interest rates, monthly payments, transaction fees, and other loan features. Once your list is complete, use an online personal loan calculator to estimate how much your new monthly payment could be.

Just remember that prequalification isn’t guaranteed. Also, be aware that moving forward with a full loan application will result in a hard credit check, which temporarily impacts your credit score.

4. Get your documents ready

Most lenders ask for similar documents during their application process. You might find it helpful to gather certain paperwork before getting started:

• Proof of identity (such as a driver’s license, state-issued ID card, passport, or available third-party verification service)
• Proof of residence (such as a driver’s license with current address, utility bill, or signed lease)
• Proof of income (such as pay stubs or tax returns)

You may need to provide additional information or paperwork based on your situation.

5. Apply for a loan renewal or refinance your loan

Once your preparation is complete, start the application process. You may be able to apply in person or online.

If approved, you may be given the option to receive your funds by check or direct deposit.

6. Pay off your old loan and confirm that the account is closed

When your new funds are available, pay off your old loan immediately. Some lenders may do this for you. Once the loan has been paid off, confirm that the account is closed and ask your previous lender for a paid-in-full letter for your records. You should also check your credit report to verify that the loan has been paid and the account is closed.

7. Manage your refinanced loan

Make note of your new payment due date and the amount due each month. If your lender offers automatic payments, signing up could help you avoid potential late fees. Check for other convenient services that may make managing your loan easier and help you reach other financial goals.

Is refinancing right for you?

Exploring refinancing may be a smart move if your finances have changed since you first applied for your loan. Refinancing could mean getting a lower interest rate or having a loan with a shorter term, or even both. However, be sure to think about all of the benefits and drawbacks first.

If you decide to renew or refinance a personal loan, compare offers to find the right fit for you — and make sure you can afford the new monthly payments before moving forward.

Kia Jackson contributed.

This story was produced by OneMain Financial and reviewed and distributed by Stacker.