Definition of refinancing
Refinancing is the simple act of taking on new debt to pay off old debt. New debt must have lower fees or better repayment terms to make refinancing worthwhile. If you have a lot of debt, consider can you refinance a personal loan.
For instance, if you have a personal loan with a high-interest rate, you can take out a credit card with a low starting interest rate to transfer the rest of the debt. You can pay less interest over time by moving the debt to a credit card if you manage to pay off the balance during the introductory period.
You can also refinance your monthly payment to grow your cash flow. If you have a loan with a high monthly payment, you can refinance your loan with a new loan with a more extended repayment time. A longer repayment term will cut your monthly payment, although you will pay more interest over time if you stay in debt longer.
Personal debt refinancing algorithm
Before deciding how to refinance loan, it is essential to know how much it will cost you. For example, if your existing loan has a prepayment penalty for repaying it early, and your refinanced loan requires you to pay an origination fee, costs can quickly add up.
You will also want to check your credit to see if you qualify for competitive terms. You can use the app to see your credit score, keep track of your financial status and explore money-saving options. If, after studying all the possible options for improving the economic situation, you still opt for refinancing, then you need to act according to the following scheme:
Choose a way to refinance your loan
Personal loans offer higher borrowing limits than credit cards. It's one of the reasons why personal loans are a standard tool for consolidating multiple debts at the same time. Personal loans also give you a structured payment plan with a predictable monthly payment amount.
On the other hand, balance transfer cards may have special offers, such as a zero-interest initial period of 18 months for balance transfers. These offers allow you to pay off your debt quickly without high-interest costs. However, be careful: if you do not pay off the debt before the end of the introductory period, you may be charged interest on the remaining amount.
Once you've decided to refinance personal loan with a loan or line of credit, you'll want to compare companies to see which ones offer the most affordable borrowing option. Consider factors such as the annual interest rate on the loan or card, fees, and borrowing limits. You also want to consider the repayment terms of the loan.
For instance, while the issuance fee is typically between 1% and 8% of the loan amount, some lenders do not charge it. For a personal loan of $10,000, this fee is between $100 and $800, which is deducted from your loan amount.
On the other hand, if you think can I refinance a personal loan using a credit card, you need to consider the usual balance transfer fee of 3% to 5%. However, the money you save on interest with the introductory rate offer could be worth the balance transfer card.
Pre-qualification and comparison of proposals
When you prequalify for a loan or credit card, the lender performs a quick and informal assessment of your creditworthiness. It is based on several factors, such as your income and savings. They often also make a soft credit request, which does not affect your credit score.
You should always prequalify to refinance a personal loan and credit card debt. It allows you to see what repayment terms you qualify for and compare offers from different lenders.
Choose a lender and formally apply
When you have chosen the loan or credit card you wish to apply for, you will submit a formal application. It will trigger a strict credit check, temporarily negatively affecting your creditworthiness. Lenders may also request supporting documents such as copies of tax returns, pay stubs, and bank statements.
If approved, your lender can transfer funds to your bank account, mail you a paper check, or pay your lender directly. Pay off your debt quickly to avoid additional costs if you receive loan funds. It's probably a good idea to call your current lender and ask him can a personal loan be refinanced and the exact repayment amount of your loan, so you don't pay more than you owe.
The impact of refinancing on your credit score
When you initially apply to refinance my loan lenders will usually let you see if you've been prequalified, which won't affect your credit score. However, if you decide to go ahead with the loan, you will be subject to a challenging credit investigation, which will temporarily negatively affect your credit score.
It can lower your chances of getting approved for a new line of credit after your loan is refinanced. However, your credit score will normalize as you continue to pay off your debt (and finally pay it off).