Can You Refinance a Personal Loan?
Here we’ll answer the question “can you refinance a personal loan?” and help you decide whether or not it is a good choice based on your circumstances. When you refinance, you’re essentially replacing your current loan with an entirely new one. The primary reason most people refinance is to secure a better interest rate, but there are other benefits as well.
- What is it?
- When is refinancing a good idea?
- When is refinancing a bad idea?
- Before you apply
- Application checklist
- After you’re approved
- FAQ for “Can you refinance a personal loan?”
What is it?
Refinancing a personal loan is essentially getting a new product in order to pay off the existing one with better terms based on your needs. These loans can be obtained from a bank or an alternative online lender. You can refi with your current provider or, ideally, shop around for something better.
As with your initial loan, the underwriter considers credit score and history, cosigner worthiness, as well as other factors associated with evaluating risk to determine your APR and total loan amount. These loans usually range from $1,000-$50,000 and rates typically start at 6%.
Next, we’ll outline whether or not it makes sense to refinance.
When is it a Good Idea to Refinance a Personal Loan?
When you ask “can you refinance a personal loan?,” the next question you ask is when it’s a good idea.
Here are some ways to know:
- If your credit has improved. This is the simplest way to secure a better interest rate and terms.
- If you want to add a qualified co-signer. If you hadn’t done so previously, this can also improve your rate tremendously.
- If you want to switch from a variable to a fixed APR. While adjustable-rate products have more appealing initial terms than others, they can balloon to an impractical amount as the loan matures. You can reset with a fixed rate which will not fluctuate over time.
- If you want to pay off the loan faster. If your credit score has improved or remained the same, this can be a great reason assuming you have the ability to increase the payment amounts, even if your new rate isn’t as low as you had hoped.
- If you want to decrease your payments. Extending the loan term and refinancing a smaller amount will reduce what you owe on a monthly basis.
- If you want to consolidate multiple accounts. While your payment may increase, you can benefit from having a single monthly amount at a lower fixed rate by combining smaller loans.
There are many benefits to a refi, but there are some situations where doing so is not recommended.
When is it a Bad Idea to Refinance a Personal Loan?
- If the fees outweigh the benefits. As you shop around, consider whether a competitive rate being offered is offset by pesky origination or other hidden fees.
- If there is a noteworthy pre-payment penalty. While uncommon, especially with online lenders, you may be charged a fee for paying off the existing loan early.
- If your credit is too low. This will typically mean a higher interest rate than you currently have. Even if you want to shorten the loan terms and have the ability to make a higher monthly payment, a lower score giving you a higher APR may override the long-term benefit of doing so.
The best way to improve your situation is to make payments consistently and on time to increase your credit score. Additionally, It may be wise to shop around to see if there is a better product out there even if the improvement to your credit has been slight. You may also want to consider adding a cosigner.
Before you Apply
- Get pre-qualified with a reputable lender. Compare rates and terms of at least three providers to see how they stack up based on your current situation.
- Count the costs. It’s not worth refinancing at a lower rate if the fees and hassle outweigh the benefits in the long-run. Not all lenders have fees, and those that do will have varying rates of up to 8% of the total.
- Collect the relevant documentation. Make sure you have all the tools at your disposal to earn a better rate.
As you weigh the question “can you refinance a personal loan?,” here is what you’ll need to have on hand in order to be prepared to apply for a refinance:
- ID and proof of residence
- Credit score
- Employment and income verification
- W-2 (or 1099)
- Bank statements
- Pay stubs
- Proof of employment
- Cosigner information (if applicable)
After You’re Approved
Make sure your previous loan has been satisfied. Many lenders send the funds directly to your account and may not reconcile the previous loan. Remember, the refi is a new product, so it’s on you to make sure the existing one has been reconciled and closed.
Make payments consistently. Automatic payments make it easy to ensure the loan is paid on time so that your credit score isn’t negatively affected.
If you’re still hesitant about whether you are in the best position to refinance, here are some frequently asked questions to help you navigate the process.
FAQ for “Can You Refinance a Personal Loan?”
Q: Does it hurt my credit?
A: It may hurt your credit in the short term if you’re refinancing a relatively new account or accounts. However, making regular and timely payments will increase your credit in the long run.
Q: Can I get a co-signer when I refinance?
A: Yes; this is a good way to get a better interest rate. You can also drop a cosigner as well if your situation requires or would benefit from doing so. Review your credit score and work with your lender to decide whether a cosigner makes sense.
Q: What if my credit is lower than before?
A: If your credit has dipped since you took out the initial loan, a refi won’t likely improve your APR unless you add a cosigner. If you’re simply looking to pay it off faster, it may be better to budget extra payments separately.
At this point, you should be prepared to refinance with confidence. Whether you’re looking to shorten your terms and get a great rate, need to extend and increase the length of your loan, or something in between, a refi can help you ensure that you meet your financial goals on your terms.