Due to the pandemic, the high number of unemployment rates has resulted in a recession. Thus, leading many people to take out personal loans. Some may treat this loan as their life-line.
As a matter of fact, among Americans, personal loan accounts are the massive debt category today. Well, the generally-known reasons why people take out personal loans is to make a big purchase, consolidate debts, and cover emergency expenses.
If you are one of the many people who are repaying a personal loan, keep in mind that low-interest rates have made or generated a chance to find some comfort via refinancing. Read on to know more!
How Refinancing Works
Personal loan refinancing works like mortgage refinancing. By that, we mean you apply for a loan with the purpose of getting better terms or rates to take the place of your former loan. A personal loan is one of the easiest and most simple loans to refinance.
Do you want to know why? Well, it involves less paperwork. Also, it is an unsecured loan. Therefore, there is no need for certain regulations, title work, or liens around funding some sort of security.
Here’s how it’ll look:
- First, you need to get prequalified with several lenders and compare terms and rates on loan. Make sure to compare the new loan with your existing loan. Also, there are several budget mistakes to avoid.
- Second, understand the fine print. Keep in mind that not all refinance options are made equally. For this reason, it is important to read the fine print. Know the origination fees or applications that can increase the loan balance.
- Third, repay the existing loan. When you think that the new loan offer is good, then the next step is to secure your terms. And once you obtain the money, use it to repay your existing loan.
- Fourth, make sure your former loan is closed by getting written confirmation.
- Lastly, pay your new loan based on its rates and terms.
Is Personal Loan Refinancing A Good Idea?
The following are some of the circumstances or situations when personal loan refinancing is an excellent idea:
- Improved Credit Or Income. Before you refinance your loan, see to it that you’re creditworthy. Remember that financial circumstances vary in the long run. Your income or credit might have become better since your last application, which can give you the opportunity to refinance your loan for a lower monthly payment or better rate.
- If you are one of the many people who have lost their job because of the ongoing pandemic, then you are not alone. In this kind of situation, you might find yourself wherein you can’t manage your existing personal loan monthly payment; personal loan refinancing can likely lower your monthly payment by stretching out your loan term. It can help you free up some money for other expenditures and gives you more flexibility in your personal finances.
- Low-Interest Rate Environment. Because rates are falling these days, you can leverage from a new loan offer. With the low-interest-rate environment plus an improved income or credit score, it can put you to better terms or rates.
When It Doesn’t Make Sense
Keep in mind that personal loan refinance is not for everyone. The following are several circumstances where it might not make sense:
- Additional Fees. Knowing the origination and application fees included with refinancing is vital. Take note that some loans bear extra fees, which can coerce you to repay more interest throughout the loan’s life and add to your balance.
- Paying More In Interest. Throughout the life of your loan, you’re adding the period it takes to repay it all. As such, you’ll stretch out your debt life and repay interest in those years. It is critical to know the long-term repercussions before you make the refinance decision.
- Prepayment Fees. Take note that several lenders might charge penalties for repaying your loan too early. Talk to your lender and understand the fine print. Make sure to read complaints and reviews to give you information into their customer service credibility and approach.
Is Refinancing For You?
Personal loan refinancing is a good idea if it, for the most part, places you in a much better financial position compared to when you begin the loan. Make sure to compute the numbers. If you can shorten the loan’s term or lower the payment, then personal loan refinancing is undoubtedly worth considering.
Takeaway
Many financial experts agree that personal loan refinancing can be an excellent solution to consolidate debts into a single payment. However, experts also suggest inspecting all the advantages and disadvantages of consolidating debts into a new loan account. Additionally, see to it that you’re well-informed about the terms and rates of the new loan before you make any financial decision. Do your research!
What did we learn?
