We all know you can refinance a home loan, but can you refinance a personal loan? A personal loan can be a great tool for covering large expenses. It’s also a good source of funds for debt consolidation and for making major purchases. But what happens if your financial situation changes or you find a better deal elsewhere? Refinancing your personal loan could be the answer.
What Is Personal Loan Refinancing?
Before we tackle this topic at length, let’s first understand what refinancing is. Refinancing is when you replace your existing loan with a new one, often with better terms. A refinance can also come with lower interest rates or a more manageable repayment schedule. So, when you refinance a home loan or a car loan, you’re replacing that particular loan with a better one.
The same goes for a refinanced personal loan. When you refinance a personal loan, it means you’re taking out a new loan to pay off the remaining balance of your current one. You will then pay off the new loan as you did the old one, but often with better terms. The goal of a refinance is to secure a better deal, whether that means lower monthly repayments, a reduced interest rate or access to additional funds.
How Can You Refinance a Personal Loan?
So, how can you refinance a personal loan? The process is similar to when you apply for any loan – you’ll need to meet the lender’s criteria, provide financial details and undergo a credit assessment. If approved, the new loan pays out the old one, and you continue making repayments under the new terms.
Here is a summary of the steps you may need to take when applying for a personal loan refinance:
- Meet the lender’s criteria – Ensure you qualify for personal loan refinancing by checking the lender’s requirements, such as income, employment status and credit score.
- Provide financial details – Prepare documents like proof of income, bank statements and existing loan details to support your application.
- Undergo a credit assessment – The lender will review your credit history and financial situation to determine your eligibility.
- Approval and loan payout – If approved, your new loan funds will be used to pay off the remaining balance of your existing loan.
- Repayment under new terms – You will now start making repayments on the refinanced loan based on the new interest rate and repayment schedule.
Reasons to Refinance a Personal Loan
Refinancing a personal loan can offer several financial advantages, depending on your circumstances. Whether you’re looking to lower your interest rate, reduce monthly repayments or access extra funds, refinancing could help you achieve your financial goals.
1. Lower Interest Rates
If your credit score has improved or lenders are offering better rates, refinancing could help you secure a lower rate. A lower interest rate means paying less over the life of your loan, helping you save money in the long run.
2. Reduced Monthly Payments
Extending the term of your loan can lower your monthly repayments, making it easier to manage your budget. However, this often means paying more interest over time, so it’s important to weigh up the long-term cost.
3. Access to Additional Funds
If you need extra cash for renovations, medical expenses or other major expenditures, refinancing can give you access to additional funds. Some lenders offer refinancing with additional funds, allowing you to consolidate other debts into one manageable repayment. However, not all lenders offer this option, so it’s important to compare loan products carefully.
Key Considerations Before Refinancing
Before deciding to refinance your personal loan, it’s important to weigh the potential benefits against the costs. While refinancing can save you money or improve cash flow, factors like fees, credit impact and loan terms should be carefully evaluated to ensure it’s the right move for you.
1. Fees and Charges
Before refinancing, check for any exit fees on your current loan and establishment fees on the new one. Fixed-rate personal loans may have early repayment penalties, which could outweigh the benefits of refinancing. Always do the maths to ensure you’re actually saving money.
2. Impact on Credit Score
Applying for a new loan will usually involve a hard credit check, which can temporarily lower your credit score. Shopping around and applying with multiple lenders in a short timeframe may reduce your borrowing power. Make sure you’re confident about your choice before proceeding.
3. Comparing Loan Terms
Not all refinancing deals are created equal. While a lower interest rate is attractive, consider the total cost of the loan, including fees and repayment terms. A longer loan term might mean lower monthly payments but could cost you more overall.
Muscle Money is Here to Help
So, can you refinance a personal loan? The answer is yes, but be careful. Refinancing a personal loan can be a smart move if it means securing a lower interest rate, reducing monthly repayments or accessing additional funds. It’s essential, however, to weigh the benefits against potential costs, such as fees and the impact on your credit score.
Before making a decision, it’s best to consult with a professional, like our finance brokers here at Muscle Money. Get the help and information you need on personal loans and other loan types by contacting us today!
Caleb Waye-Harris, Senior Manager of Asset Finance at Muscle Money, has almost 15 years of relevant experience in the finance industry. His extensive background includes project management, consumer and commercial lending and asset-based lending.
