Are you looking to manage your existing debt optimally? Are you unable to pay the heavy EMI of your existing loan? Then, refinancing can help. Refinancing a personal loan is basically replacing your current loan with a new one obtained either from your current lender or a new lender. The funds taken as a new loan are used to settle the existing loan so that the new EMIs are fixed for the new loan.
The concept behind refinancing is finding a new loan that offers a lower interest rate or more favourable monthly payments to replace your otherwise expensive current loan. Before you hop to twisting the figures, we can help you understand the intricacies of personal loans and how refinancing can be utilised to your benefit.
Meaning of Personal Loan Refinancing
Are you looking for a powerful method to optimise your finances? Personal loan refinancing can help largely. Personal loan refinancing is the process of repaying your current loan with a new loan. Now you must be wondering, how does that make sense? If you get a new loan with a lower rate of interest and smaller EMI options, then wouldn’t it be wise to avail of that loan to repay the existing loan that costs higher EMIs?
Refinancing might sound easy, but it requires careful consideration of all the terms and conditions that may apply. You need to evaluate your existing loan and then look for the refinancing loan options. Calculate the potential savings your chosen refinancing loan can offer, and then go for it. If dealt with precision, refinancing a personal loan can bring you greater financial flexibility and reduce your debt burden over time.
How does a refinance loan work?
When you refinance a personal loan, the following steps are followed:
- Application for a new loan.
- The new lender will offer you terms and conditions based on your credit score, income, and other financial factors.
- The new lender pays off your existing loan.
- Now, you will make payments on the new loan according to its terms.
Benefits of Personal Loan Refinancing
The following are the advantages of refinancing a personal loan:
1.Lower Rate of Interest: If your credit score has improved since you took out your original loan, you might qualify for a loan with a lower interest rate. This helps save a lot of money from EMI.
2. Reduced Monthly Instalments: Refinancing helps you extend the loan term or get a better rate of interest, this can lower the monthly EMIs as well. Thus, making debt more manageable.
3. Loan Consolidation: If you have multiple high-interest personal loans, refinancing helps you consolidate them into a single loan with a potentially lower rate.
4. More Savings: Even a small change in rate of interest can help you save big on the monthly payments. This way you can save money for other financial goals or emergencies.
5. Change in Tenure: If you do not wish to pay high EMIs for a long time, refinancing to a shorter term can help you pay off your debt faster and save on interest.
Types of Refinancing
Let us explain you the different types of refinancing:
1. Rate-and-Term Refinance: This is the most common type in India, which focuses on changing either the interest rate or loan term of the existing loan. This leads to reduced monthly instalments.
2. Short Refinance: Just the opposite of the previous one, this type of refinance allows lenders a loan for less value than the existing loan. This is a great help if you are struggling to make monthly payments.
3. Debt Consolidation Refinance: This involves taking out a new loan to pay off multiple existing loans. This simplifies and consolidates your payments along with lowering your overall interest rate.
4. Cash-Out Refinance: With this option, borrowers take out a new loan of a greater value than the existing loan. The existing loan is paid off and the difference amount is given to the borrower in cash, which can be used for various purposes such as home improvements, debt consolidation, or other expenses.
5. No-cost Refinance: In this case, the lender covers the closing costs, either by charging a higher rate of interest or by increasing the new loan amount. It is suitable for those who want to refinance without upfront expenses, though it may lead to higher long-term costs.
6. Streamline Refinance: Streamline refinancing minimizes the paperwork and often waives the need for an appraisal. Available majorly for the government backed loans like FHA or VA loans, it can be a quick way to secure better loan terms easily.
Steps to Refinance a Personal Loan
To refinance a personal loan, you must go very carefully, especially when you are indebted with a substantial loan amount. Consider the following steps to refinance a personal loan:
- Take notice of your credit score:
The most important step is to review your credit report before initiating the refinancing process. Stashfin provides an elaborate credit report that can help you evaluate your creditworthiness and identify any errors. It plays a crucial role in determining the terms you will be presented with.
- Do the required calculations:
Evaluate your current personal loan instalments, the remaining amount, and potential prepayment penalties. This will help you understand the present situation better in order to choose an appropriate refinancing loan amount.
- Compare different options:
Look keenly for the better loan options of refinance in the bank or from a different lender. Research rates, terms and conditions from various sources such as online lenders, banks, and credit unions, or seek advice from a finance expert in this comparison process.
- Pre-qualify for loans:
Enquire for a soft credit check to estimate the potential offers. This allows you to compare and negotiate potential rates and terms without affecting your credit.
- Select the best offer:
Thoroughly evaluate the pre-qualification offers, considering not only the interest rate but also the loan term, origination fees, and other associated expenses. Choose the offer that offers the most significant advantages while aligning with your financial goals and budget.
- Apply for the new loan:
Once you finalize the loan, apply for it with the required documentation. Keep your financial documents ready.
- Settle the old loan amount:
After the new loan is approved, pay off the existing loan amount. Make sure that the old loan is closed with the due procedure and hold any further payments until you get clarity.
- Pay a revised comfortable EMI for the new loan:
After you have successfully refinanced your loan, ensure timely payments in order to maintain a good credit score and avoid penalties.
Things to Remember When Refinancing Personal Loan
- Carefully Check the Fees
Be aware of any origination fees, prepayment penalties, or other hidden costs associated with refinancing.
- Impact on Credit Score
Applying for a new loan leads to a thorough speculation on your credit report, which might temporarily lower your score.
- Long-Term Costs
However, you will be eased with low EMI, and there will be high chances of extension in loan tenure, resulting in paying more interest over time.
- Debt cycle Risk
With repeated refinancing, you might fall into the trap of the debt cycle. On top of that, if you are refinancing to get additional cash, it might lead to substantial interest costs.
Bottom Line
Refinancing a personal loan is a great option to get rid of an expensive existing loan, and it even saves you money when you have too much debt. It also makes financing manageable with its magic of debt consolidation, but you need to have a strong credit score for that. If you choose the right type and amount vigilantly, then you can make the most of this facility.
Frequently Asked Questions
Does refinancing a personal loan hurt your credit?
Yes. It does impact your credit score, but only temporarily. When you apply for refinancing a personal loan, lenders conduct a hard inquiry on your credit report. This brings a slight fall in the score. However, if the refinancing process is completed, it can improve your credit utilization and payment history over time, potentially boosting your score.
Does refinancing lower your payment?
Yes. It usually resets the loan term and the loan interest rates. This leads to a reduction in overall monthly instalments.
When should I refinance a personal loan?
Refinancing a personal loan can be beneficial if you are offered a lower interest rate. Even a slight fall in the rate of interest can lead to significant savings over the life of the loan. However, it is important to consider the fees and risks involved and their impact on your credit score.
Do you get money when you refinance a loan?
Generally, you don’t get cash when you refinance a loan, but if you have opted for a cash-out refinance then you will get the difference in cash.
Can I refinance my personal loan from another bank?
Yes, you can. This process is called “balance transfer.