If you're struggling with multiple loans or you qualify for a better loan offer, you can use refinancing to consolidate your debt and help reduce the cost of your loan.
See if refinancing is right for you and compare loan options below.
What is personal loan refinancing?
Personal loan refinancing involves taking out a new loan, preferably with better terms, and using it to pay off existing loan debt.
If you qualify for a loan with a lower interest rate than your current personal loan, refinancing might help to save you money. Refinancing to a more competitive rate may lower your monthly repayments and/or your total interest repayments over the course of the loan.
You can also use refinancing to consolidate multiple debts into a single monthly repayment.
How does personal loan refinancing work?
Refinancing a personal loan works much in the same way as refinancing a home loan. You apply for a new loan which covers the amount you have left to pay on your current loan(s) and use the funds to pay off the existing loan debt. Some lenders can organise the funds to be paid directly to the other lender on your behalf.
You will still have the same amount of debt, but will be saving money if the new loan offers better terms, lower fees or a reduced interest rate than your existing loan.
Is refinancing a personal loan a good idea?
If you qualify for a lower rate, a personal loan could potentially save you money over the course of the loan. If your credit score has recently improved, refinancing your personal loan may be a good idea.
If you have multiple debts, refinancing to a single monthly repayment may save you time and money, and allow you to budget more effectively.
However, you should always consider all variables before refinancing. Take into account any fees from all loans concerned, such as early exit penalty fees or establishment costs, as these might offset the savings of a lower interest rate.
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There are a few reasons why people choose to refinance their personal loans.
Your credit rating has improved. If your credit rating has improved, you may qualify for a loan with better terms and a lower rate than your current loan(s). It is always a good idea to keep an eye on your credit score; if you notice an improvement, it might be time to consider refinancing.
You've found a better deal. If you think you've found a better deal it might be worth using a personal loan repayment calculator, such as the one below, to compare the two loan options and see if the move will be worth it. When comparing loans you shouldn't just focus on interest rates – look at ongoing fees and repayments, as well as loan establishment costs. You should also consider the features of a loan to make sure they suit your needs. For example, if you sometimes make additional repayments, you should confirm whether this is allowed with the new loan.
You're consolidating debt. If you are refinancing a personal loan to consolidate your debt then you will need to do a few more calculations. First, you should calculate the total monthly repayments for each of your existing loans. This should include fees, rates and any other charges you incur from your loan. You should then compare this figure to what you can expect to pay for the new consolidated loan. Using a personal loan repayment calculator can simplify this process.
Will you save by refinancing your personal loan?
If you've found a loan that you think suits your needs, compare it side by side with your existing loan d in the loan comparison calculator below.
Calculate the costs of refinancing: Include break and exit fees and the establishment fees for your new loan to ensure it will be worth your while.
Apply for the new personal loan: If you meet the criteria for the new personal loan, submit your application. You may have to note that your loan purpose is to refinance or consolidate.
Pay off your current loan with the funds from the new loan: In the case of some debt consolidation loans, the lender may be able to arrange this for you. However, many personal loan lenders deposit funds directly into your current account, meaning you will need to organise paying off your existing loan yourself.
Make sure the old loan is closed: Confirm with your previous lender that your loan account is closed and you have no balance outstanding.
What are the costs of refinancing a personal loan?
Banks and lenders don't want you jumping ship every time you see a cheaper rate from a competitor, which is why refinancing can come at a cost.
Fees to take into account when calculating the costs of refinancing include:
Application fees could set you back as much as $300, so confirm if you will be charged a fee on the new loan.
Early repayment fees are sometimes charged by lenders and can put a considerable dent in the savings you could make from switching.
Ongoing fees are also a cost that should be taken into consideration. These fees can add up quite quickly and may offset a lower rate offered by the new loan.
Is it worth refinancing your personal loan?
The value of refinancing will depend on your current personal loan and also your financial situation. To determine the value of refinancing you should calculate what your current loan(s) are costing you and compare that to the cost of your new loan. Remember to include the initial costs for setting up a loan and also the interest you will save over the life of the loan, not just in the initial period.
You should also consider other features of the loan when deciding whether to refinance. For example, if you are refinancing from a fixed rate loan to a variable rate loan you may save money as long as the variable rate lasts, but t this rate could change and you may discover you would have been better off staying with your original loan.
The same goes for other features of the loan; for example, you may be used to making additional repayments to pay your loan back sooner, but your new loan may not have this option, or may charge you for it.
When determining the value of refinancing, remember to take all aspects of both loans into consideration.
Matt Corke is the head of publishing in Australia for Finder. He previously worked as the publisher for credit cards, home loans, personal loans and credit scores. Matt built his first website in 1999 and has been building computers since he was in his early teens. In that time he has survived the dot-com crash and countless Google algorithm updates.
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