Tue, 17 May 2022

What would you do if you were handed a final notice from a creditor? If you have a huge debt to repay and your current financial situation does not allow it, refinancing a personal loan is also an option.

Refinancing or consolidating your debts into one lump sum payment is the ideal solution for debt relief. That's because it gives the consumer a more manageable amount of debt to repay.

Not all financial institutions offer refinancing options for personal loans. So, one must be careful when researching which lender to approach for this service. However, there are some important factors you must take into consideration before entering any contract.

The Best Time To Refinance A Personal Loan

Most of the time, a borrower is allowed to refinance a personal loan as soon as they start making some payments. However, several circumstances make refinancing a personal loan an even better advantage to the borrower. It's best to consider refinancing your personal loan if you:

  • Want to lower your monthly payments;
  • Eligible for a lower interest rate;
  • Don't have any access to another source of funds (like a balance transfer credit);
  • Are okay with potentially hurting your credit score as a result of the new personal loan application process;
  • If you are experiencing a balloon payment that you're unwilling or unable to pay for some reason.

How To Refinance A Personal Loan

The following are steps to refinance a personal loan:

Check Your Credit

Looking at your credit score is a great way to know what type of loan or which lender might be the best fit for you. A good credit score can help you land personal loans with low-interest rates and flexible terms. However, if you have poor credit, it would be best to take time to improve your credit scores to avoid getting personal loans with higher interest rates.

Shop Around

It's advisable to shop around and compare loan offers. Start by making a list of all lenders available that offer this type of loan and do your research.

When shopping around, it's recommended to consider the maximum and minimum loan amounts, interest rates, and loan terms that each lender might offer. It will also help if you know about each lender's credit score requirements to help narrow your list.

You can refinance a personal loan through any lender, such as a bank, credit union, an online lender. Some lenders can offer you an easy and accessible way to refinance your loan. For example, CreditNinja deposits loans into your bank account, making the process convenient, especially if you don't have spare time to visit a physical office.

Apply and Get Accepted

After shopping around and identifying potential lenders, you can submit an application with the top lender that you think can help you out. You can try to submit all of your loan applications within 14 days to limit the impact on your credit scores. After doing so, you can then compare the official loan offers each lender might make before you can decide to accept the best one.

Repay Your Old Loans

It's essential to know that few lenders can directly send the money you borrow to your current creditors to repay your loans. On the other hand, some lenders might directly send you the loan amount. You can then use the funds to pay off your old loans by yourself instead.

Confirm Your Old Loans Have Been Repaid

Don't forget about your old debt until your loan balance is zero and closed. It will be bad for you if you accidentally wind up missing a payment because of the wrong timing.

Can A Personal Loan Refinance Lower Your Credit Score?

Yes, refinancing your loan will negatively impact your credit score. However, this only tends to be minimal. The minor drop your credit score will experience is due to the hard credit inquiries from your loan applications and opening a new account.

Fortunately, your credit scores will recover over time, especially if you make on-time payments consistently. The minor drop will all be worth it if choosing to refinance can help you save some money and can help manage your debt more manageably.

To Sum It Up

If you want to make your existing loan even more affordable, refinancing a personal loan might make it work. However, it's vital to know that it will depend on several factors, like your credit score. Moreover, you can choose to refinance your loan anytime after you have already made a payment on your old loan.

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