The Benefits of Refinancing a Personal Loan
While the benefits of refinancing your personal loan can vary depending on your objectives, they can generally range from obtaining a lower interest rate to lowering the entire cost of your loan.
Better interest rate: If interest rates have reduced or your credit score has improved, you may be able to save money on interest.
Loan payout faster: If you’re okay with making higher monthly payments and want to get out of debt sooner, you can refinance a personal loan to a shorter term. This has the extra benefit of lowering the total amount of interest you’ll pay.
Extending your loan payback period can make your payments feel more bearable if you’re having trouble making them on time, because stretching the terms reduces your monthly bill.
Payment stability: If you’re converting from a variable rate to a fixed rate, refinancing can provide payment stability.
The Drawbacks of Refinancing a Personal Loan
Refinancing is not always the best option. Consider the following disadvantages before committing to a refinance:
- Extra fees: When you take out a new loan, you may be required to pay additional lender fees, which can reduce the money-saving benefits you are attempting to attain.
- Prepayment penalties: Some loans have a prepayment penalty if you pay off the balance before the term expires. Because refinancing necessitates paying off the previous loan and replacing it with a new one, it’s best to review the terms of your current loan to see if you’ll be penalized for paying it off early.
- Greater interest expenses: Extending a loan period typically leads in higher interest charges over time. If you’re seeking to reduce your monthly payment due to financial issues, refinancing may still be an option. Just keep in mind that the reduced monthly payment will most likely not save you money in the long term.
- Impacts of credit score: Because refinancing counts as a new loan inquiry, it might have a negative impact on your credit score, even if the impact is minor and temporary.
- Time spent for research and application: It takes time to research lenders, compare quotes, and submit applications. If your loan is nearly paid off, refinancing may not be worth the trouble.
In conclusion
- If you want to refinance a personal loan, you need do your homework: Will you get a cheaper interest rate? A reduced monthly installment? Better words? You can decide whether refinancing makes sense after weighing the advantages and downsides and shopping around with multiple lenders.