3 Smart Reasons to Refinance a Personal Loan

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Becoming strategic about taking charge of your finances? You might want to look at ways to refinance personal loan debt.

If you have a high interest rate or your monthly payments aren’t ideal for your current budget, remember you might not be stuck with your original loan. You could refinance personal loan debt to find a better deal.

Refinancing might sound complicated, or you might not be sure if the option is right for you. This article will help you learn more about how to refinance a personal loan and the scenarios that might help you get out of debt faster.

Can you refinance your personal loan?

The short answer: Yes, it’s possible.

When you refinance your personal loan, you usually work with a new lender to borrow money to cover the amount you currently owe. You use this money to pay back your existing loan and then start repaying your new debt. The goal is to have the new loan’s interest rate or terms be more favorable for you.

Sometimes, you can refinance your loan with your current lender. If your credit or income has improved since you took out your personal loan, your lender might be willing to offer you a lower interest rate.

A lower rate potentially could save you thousands of dollars over the course of your loan. This could help you pay your debt back faster or start an emergency fund if you want to create a cushion in your savings.

3 reasons to refinance your personal loan

There are a few key scenarios in which it’s savvy to refinance personal loan debt.

1. Your credit score has improved

If you had bad credit when you took out a personal loan, you might have a high interest rate. However, if your credit score has improved since then — which could happen if you made loan payments on time — you might be able to qualify for a lower rate on a new loan.

A credit score below 580 is considered poor, while a score above 670 is considered good. You can check your credit score for free to see how much it has changed since you borrowed money and figure out if refinancing your personal loan can save you money.

2. You found a better deal with another lender

Even if your credit score didn’t increase significantly since you took out your original loan, you might be able to find a better deal with another company. Online lending has become competitive. Some lenders offer a variety of deals aside from lower interest rates in a quest for new customers.

SoFi, for example, offers a 0.25% discount on the interest rate if you sign up to make automatic payments on a loan. The company also offers an unemployment protection program, which could suspend monthly payments in case you lose your job. Benefits like these might make the loan worth refinancing even if the move doesn’t offer significant savings.

3. You need lower payments

If your monthly loan payments are unmanageable, you might be able to negotiate different terms on a loan with a new lender, such as lengthening the repayment period. It would take you longer to pay back the amount borrowed and cost more in interest charges over the life of the loan, but you’d likely have a smaller bill each month.

If you miss payments often because your monthly expenses are too high, lowering your personal loan bill could help in the short term.

What to consider before you refinance personal loan debt

Refinancing your personal loan isn’t beneficial in all cases. Here’s what to be aware of as you research lenders and their options.

1. You might not get the advertised interest rate

It’s common for lenders to advertise their lowest interest rates. The problem? Those rates usually are reserved for borrowers with excellent credit and good incomes. To get a realistic estimate of the rates you might qualify for, comparison shop with several lenders.

Online lenders such as SoFi, Earnest, and Avant do soft credit pulls to estimate your interest rate. These checks don’t impact your credit score and the rate estimates can be useful while comparing different offers.

Our personal loan marketplace can help you quickly compare loans and filter lenders by your top criterion.

2. There could be fees to refinance

Some lenders charge high fees on new loans. LendingClub, for example, has an origination fee of 1% to 6% of the loan amount. It’s deducted upfront, so the money you receive will be less than the amount you are approved for. Also, LendingClub adds the origination fee to your estimated APR, which can raise your final interest rate significantly.

Factor the fee and its impact on the APR into your calculations as you decide whether refinancing could be beneficial. Or, look for lenders that don’t charge origination fees.

3. You might pay more over the life of the loan

If you extend the length of the repayment period of your loan, you could lower your monthly payment amount. But you might also pay more in interest charges overall, especially if your rate doesn’t go down.

This option might work if you’re struggling to pay your monthly bills, but the additional interest costs should be considered before you sign on the dotted line for your new loan.

How to refinance personal loan debt

Here’s the process you could follow if you want to refinance your personal loan.

1. Check and improve your credit score

Once you know your credit score, you’ll have a better idea of what loans you could qualify for.

If you don’t think your credit isn’t high enough, you can improve it before applying. There are other credit-building tools that can help you raise your score.

2. Shop for the best deal and apply for a new loan

As you research different lenders, create a list comparing the estimated interest rates, monthly payments, and minimum credit score you’d need to qualify with each company. Other things to consider are the length of the loan and any extra fees. We’ve compiled a list of some of the most popular lenders and their rates if you’re looking for a good place to start.

Instead of doing the calculations on your own, save time by using our personal loan calculator to compare costs.

Once you’ve decided on a lender, submit an application online or in person. The lender likely will ask for your financial information such as pay stubs or your most recent W-2 forms.

3. Pay your old loan and make sure it’s closed

Once the funds from your new loan come through, immediately pay off your original loan. Some refinancing lenders will pay your old loan off directly, making the process seamless.

Make sure you receive documentation from your original lender proving the debt was fully paid. You also can check your credit report to confirm that the old loan was closed correctly.

 

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Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

RATES (APR)loan amount
5.74% – 18.07%1 $5,000 to $100,000
5.67% – 35.99% $1,000 to $50,000
5.99% – 35.89%* $1,000 to $50,000
5.99% – 24.99%3 $5,000 to $35,000
5.99% – 29.99%4 $7,500 to $40,000
15.49% – 35.99% $2,000 to $25,000
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1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Fixed rates from 5.99% APR to 18.07% APR (with AutoPay). Variable rates from 5.74% APR to 14.70% APR (with AutoPay). SoFi rate ranges are current as of October 10, 2019 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.74% APR assumes current 1-month LIBOR rate of 2.05% plus 3.08% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.
    See Consumer Licenses.
  3. Minimum Credit Score: Not all applicants who meet SoFi’s minimum credit score requirements are approved for a personal loan. In addition to meeting SoFi’s minimum eligibility criteria, applicants must also meet other credit and underwriting requirements to qualify.
  4. If you lose your job through no fault of your own, you may apply for Unemployment Protection. SoFi will suspend your monthly SoFi loan payments and provide job placement assistance during your forbearance period. Interest will continue to accrue and will be added to your principal balance at the end of each forbearance period, to the extent permitted by applicable law. Benefits are offered in three month increments, and capped at 12 months, in aggregate, over the life of the loan. To be eligible for this assistance you must provide proof that you have applied for and are eligible for unemployment compensation, and you must actively work with our Career Advisory Group to look for new employment. If the loan is co-signed the unemployment protection applies where both the borrower and cosigner lose their job and meet conditions.
  5. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
2 Includes AutoPay discount. Important Disclosures for Payoff.

Payoff Disclosures

  1. All loans are subject to credit review and approval. Your actual rate depends upon credit score, loan amount, loan term, credit usage and history. Currently loans are not offered in: MA, MS, NE, NV, OH, and WV.
3 Important Disclosures for FreedomPlus.

FreedomPlus Disclosures

  1. All loans available through FreedomPlus.com are made by Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Eligibility for a loan is not guaranteed. Loans are not available to residents of all states – please call a FreedomPlus representative for further details. The following limitations, in addition to others, shall apply: FreedomPlus does not arrange loans in: (i) Arizona under $10,500; (ii) Massachusetts under $6,500, (iii) Ohio under $5,500, and (iv) Georgia under $3,500. Repayment periods range from 24 to 60 months. The range of APRs on loans made available through FreedomPlus is 5.99% to a maximum of 29.99%. APR. The APR calculation includes all applicable fees, including the loan origination fee. For Example, a four year $20,000 loan with an interest rate of 15.49% and corresponding APR of 18.34% would have an estimated monthly payment of $561.60 and a total cost payable of $7,948.13. To qualify for a 5.99% APR loan, a borrower will need excellent credit on a loan for an amount less than $12,000.00, and with a term equal to 24 months. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to directly pay off qualifying existing debt; or showing proof of sufficient retirement savings, could help you also qualify for the lowest rate available.
* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

* Personal loans made through Upgrade feature APRs of 5.99%-35.89%. All personal loans have a 1.5% to 6% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. For example, if you receive a $10,000 loan with a 36-month term and a 17.98% APR (which includes a 14.32% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $343.33. Over the life of the loan, your payments would total $12,359.97. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Personal loans issued by WebBank, Member FDIC.

** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.

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