Typically, a lot of people get a personal loan to invest in a new car, wedding, or even to consolidate their debt. It important to get all of the information you can get about a loan before applying. There are different loans out there for an individual’s specific agenda and circumstance.
Moreover, it’s very important for you to understand how loans work and how to borrow responsibly. This is why we put this guide together to go over things you need to know about loans.
What is a Personal Loan?
In a nutshell, a loan is an agreement between the lenders, which gives to the other party such as the borrower, a lump sum of money. The borrower has to pay back that amount over a period of time that the lender determines. A loan consists of interest payments as well as other charges for the administration of the loan.
In addition, your loan-term will be different from lender to lender, but it is written in the agreement. The lender requires the borrowers to comply with the repayment term that’s in the contract; they place an emphasis for you to know the due date and interest rate.
Even though there are plenty of loans to choose from, the two main types are secured and unsecured loans. Secured loans require an asset, such as your home, for collateral. Unsecured loans are widely available for people who have a good credit score and good employment.
How Do Personal Loans Work?
Obtaining a personal loan nowadays is not how it used to be. Back in the day, lenders would want to see your credit score, tax returns, and your details of employment to decide whether or not to give you a loan and how much to charge you.
In the times we’re living in today, we have a new breed of lenders. Lenders today factor in things such as your SAT scores and your social media accounts to determine who to lend to and the amount of interest they want to charge. Moreover, it’s easier to obtain a personal loan now than it was years ago when traditional banks and credit unions had dominance over the personal loan industry.
Personal loans have different sixes and term lengths. There are loan terms that last for years and there are others that are due for repayment in a couple of weeks such as a payday loan. If you repay a payday loan in full in that small window of time, you won’t have to pay interest. On the other hand, you will have to pay the origination fee of that loan.
An installment loan is a type of loan that requires interest immediately. The amount of interest you pay is contingent on the size of the loan and the interest rate. Also, keep in mind that there are lenders out there that offer low-interest rates that have lower terms.
A personal loan calculator can compute whether or not it’s cheaper to choose a loan with a lower interest rate in comparison to a loan with a higher interest rate. Do you want to know an important guideline? Don’t borrow an amount you aren’t able to pay back in full.
What Does it Mean to Refinance a Personal Loan?
In simple terms, refinancing is trading one debt for another, at a bank that’s different from the other one, with new terms and conditions. Refinancing a loan also gives you the ability to place your old debt into a new one that has better terms and conditions.
The term refinance is also in reference to changing the mortgage on your home. Some people call it remortgaging. Moreover, this type of loan is subjected to refinancing because of its extended tenure and how much it changes from when you initially get the loan to the time it takes for you to repay the loan in its entirety.
Overall, you can refinance any loan that’s in your favor. You can do this for credit cards too; it’s known as a balance transfer because of the type of debt. Now that you have a good grasp of what it means to refinance, let’s talk about how you can take advantage of refinancing.
Refinancing Vs Debt Consolidation?
It's not exactly the same thing.
Even though they function in the same way, you can pay off more than one loan by consolidating and only one loan by refinancing. You may come across people using these two terms interchangeably.
Can You Refinance Your Personal Loan?
In order to refinance a personal loan, you have to do the same steps as you would for applying for a personal loan. Things, like building your credit, choosing the right lender, and searching for the right loans, are examples of what you have to do.
If the lender gives you the right to refinance, you’ll get the new loan. Afterward, you have to close out the old one and begin making payments on the new one.
Below are the steps you need to do in order to refinance your personal loan:
1. Improve Your Credit
Before you choose to refinance, think twice if you really need to or not. If you have a strong credit history, then it’s a good move to refinance.
Before you apply, do what you need to do to increase your score. The main factors that impact your credit score are your ability to make on-time payments amount of credit you available that’s based on your credit limit. Moreover, it’s wise to get your free credit report and dispute errors that you find.
If you pay your monthly payments on time and your credit score continues to increase, you are in a better position to request a loan refinancing.
2. Compare Offers From Lenders
After you are done reviewing your finances and increasing your credit score, you are ready to contact you lenders of choice and compare their offers. Also, let the lender know upfront that you are willing to go with a different lender if you don’t like what the new interest rate is going to be.
Refinance Loan Amount
The amount of money the lender will loan you is going to be different across all boards. If one lender offers you more money than the other, that doesn’t mean that’s the best loan to choose. Remember that it costs more to borrow the money than it does to spend it. If you are able to finance a part of the investment yourself and borrow the other amount you need, this is a good option for you.
Fees and Charges
Every lender has their own way of charging fees and other charges. Research the competition to see what they are charging, and then choose the lender with the lowest fees.
Loan Terms and Conditions
Lenders also differ from one another regarding their terms and conditions. For instance, one lender may offer a loan with a fixed rate while the other may offer a variable rate. Could there be a fixed term as well? Moreover, find out everything you can about the loan before applying.
3. Review Your Loan
As with any other loan, it takes a lot of time and hard work to refinance a personal loan. The process consists of tons of paperwork. You also have to review over everything before you finalize the loan. This process will be even longer if you decide to go with a new lender instead of sticking with the old one.
Furthermore, you’ll have to hand over information such as your credit report, proof of income, debt, and other financial information. It would be best if you ask your lender of choice a lot of questions to ensure that you are well-informed.
Remember to always get your questions answered and read the fine print.
Here are some things to watch out for:
- Prepayment penalties. Most lenders usually don’t charge anything if you pay off the loan early, which is known as an exit fee as well.
- Automatic withdrawals. If your lender requires automatic payments from your bank account, we recommend that you set up a low balance to prevent overdrafts.
- APR surprises. The annual percentage rate consists of the whole cost of refinancing a loan, along with the origination fees, which are things that should be clearly addressed.
- Payments are reported to credit bureaus. When lenders report on-time payments, it’s positive on your credit report. Lenders reported by NerdWallet report to credit bureaus.
- Flexible payment features. Lenders will also give you the option to choose your payment due date. Some will even waive late fees on occasions or won’t require a payment from you in times of hardship.
- Direct payment for creditors. There are also lenders out there that will send borrowed finds straight to the creditors. This is really good for individuals who are consolidating debt.
4. Close Out Your Original Loan
After your lender approves you for a refinance, they require you to write your signature on the loan documents. It’s important to note that you need to close out your former loan first. If your loan refinance is with the same lender, they will close out your former loan for you.
If your loan-refinance is with a new lender, it is your responsibility to close out your former loan. No matter what your loan refinancing process looks like, closing your former loan is a crucial step. If you don’t, you will suffer serious consequences.
When to Refinance a Personal Loan?
There are many reasons why people will look into refinancing his or her personal loan. For instance, they may want more flexibility with their money, consolidate debt, or simply to get better term options.
Moreover, whatever the reason why you a loan refinance is, it’s important for you to make the best decision possible.
You Cannot Afford the Repayments
At times, financial hardship can arise. For instance, you may have suffered a salary decrease or you have another bill that takes a lot of your money.
In other words, you are not able to pay the amount you normally paid without complications. Since you can’t just wash debt away, you have the option to get another loan with a longer term or lower your interest rate which results in you having lower, monthly payments.
Accessing More Funds
It’s possible that you need to borrow an additional amount than what you previously thought when you took out your first loan. Under this circumstance, you may not have to refinance your personal loan. All you have to do is request a personal loan amount increase instead. Please be aware that in doing so may increase your repayments and loan term.
Changing Your Loan
Figuring out what area of your loan you want to modify is a great start when you’re wondering whether or not refinancing is the best choice.
So, does refinancing make sense?
Using our refinance breakeven calculator will help you to determine whether or not you should refinance your personal loan.
Moreover, input any closing costs, such as a loan origination fee, into the “other closing costs” section. Even though it’s not fancy, it’s a great starting point.