Would Refinancing Your Personal Loan Make Sense for You?

According to an Industry Insights Report by TransUnion, the average debt for unsecured loans per borrower was $10,344 in the second quarter of 2022. Sometimes, people cannot manage a personal loan even as small as $5,000. From electricity bills to rent, there are plenty of things that eat into your salary. By the month’s end, you are out of money and don’t know how to pay for your remaining necessities. 

So, if you are having trouble paying off your personal loan, why not refinance it? Before you approach a lender to discuss terms, assess your financial situation to ensure you can afford the new loan. 

What Is Personal Loan Refinancing?

When a personal loan is refinanced, it is replaced with a new loan with different terms. You can talk to the same bank or lender you borrowed your existing loan from. Once your loan application is approved, you can discuss the terms with the lender and start making the monthly payments. The next consideration is whether it makes sense to refinance a personal loan depending on your financial status. 

You Qualify For A Lower Interest Rate

One of the reasons people are not able to afford their monthly payments is the interest rate. If you took out a personal loan on a Bad credit score that has improved, you are more likely to get a lower interest rate on the new loan. Having a lower interest rate will help you lower your monthly payments and allow you to pay the old personal loan within the term.

There’s No Origination Fee

If the lender gives you the new personal loan without charging a fee, you will save more on interest. We recommend going to your old lender for a new loan and explaining your situation. 

You Can Make Bigger Payments

If the new loan allows you to pay your debt in 24 months instead of 36, you will accrue less interest, allowing you to be debt-free in a short time.

Here’s an example to help you understand how refinancing a personal loan works:

Remember to shorten the repayment period by at least 12 months. The longer you take to pay the loan, the more you will accrue in interest. 

Let’s say that after refinancing your loan to lower the monthly payments, you choose a period of 36 months. While the low payments allow you to manage your finances and leave room for some personal expenses, you pay more interest. The longer you choose to extend the loan, the more expensive it will become. 

In conclusion, refinancing a personal loan only makes sense if the lender offers you a lower interest rate than the one on your old loan. So, calculate your interest savings first, and then, approach the lender to negotiate the interest rate. The higher your credit score, the more the lender will likely offer you your desired terms.