What you need to know before refinancing your personal loan
Life can be unpredictable, and your circumstances can change while you’re paying off your personal loan. Refinancing your loan could potentially help improve your situation, however, there are a few questions you might like to ask yourself first.
Q1: Should I refinance my personal loan?
Personal loan refinancing is essentially taking out a new loan, preferably with better terms and interest rates, to pay off your existing debt. Here are several situations where you might consider refinancing:
# You have multiple debts
If you are struggling to keep on top of your repayments, you could consider consolidating multiple debts into a single loan at a lower interest rate to help reduce your interest costs and manage your repayments more effectively.
Try our personal loan calculator to help you work out the total monthly repayments for your existing and consolidated loan.
# You want to get a better deal
You may have taken out your personal loan a while ago and want to see if you can qualify for a lower interest rate or take advantage of other loan features that your current lender is unable to provide you.
# You need access to more funds or a longer loan term
Your lifestyle may have changed, and you might need to borrow more money or look for a new loan that can offer an extended loan term to help lower your repayments.
Beware of increasing your loan amount or extending your loan term as this can increase the costs of your loan in the long run. As always, only apply for more credit if and when you really need it.
# Your credit score has improved recently
If your credit score wasn’t in good shape when you first took out your personal loan, you might be paying a high interest rate. If you’ve noticed an improvement in your score, you could consider refinancing, as a good credit score can help you get a better deal and in turn help you reduce the amount of interest you’ll pay across the remaining loan term.
Remember, refinancing isn’t always the right option. If you have a small amount of debt remaining and you’re nearly ready to pay off your loan, refinancing could potentially place you in a worse position. Consider whether you’d be better off paying the amount remaining as soon as possible, rather than taking out a new loan.
Q2: Am I eligible to apply for a new personal loan?
Refinancing your personal loan follows the same guidelines as applying for a new loan and aside from checking that you meet the eligibility criteria, demonstrating to the lender that you’re a responsible borrower is crucial.
With Comprehensive Credit Reporting in place, your repayment history is now included on your credit report. This means if you’ve been late on your other loan repayments or have blemishes on your credit history, your credit score could be negatively impacted and your application to refinance to a new personal loan could get declined by the lender.
Check your credit score for free & get access to your repayment history so you know where you stand before you refinance.
Q3: Would I save money if I refinance my personal loan?
Refinancing comes at a cost, that’s why it’s important to look at every aspect of the refinance process to understand the fees and costs involved before switching to a new loan.
To determine potential savings by taking out a refinance loan, you’ll need to work out how much your current loan costs and compare it against the new loan you’d like to refinance to. Don’t forget to include any early repayment fees you’ll need to pay, as well as initial set up costs and any ongoing fees of the new loan.
If you’re still unsure if refinancing is the right option for you, a good starting point is to work out which part of your existing personal loan you’d like to change to help you assess whether refinancing is suitable for your circumstances.
Want to learn more about personal loans? Head over to the Learning Hub and get started today.