Refinancing a personal loan refers to taking a new loan to pay off an existing loan, typically for lower interest rates or better loan terms. A timely refinancing of your personal loan can help you save substantial money and ease your repayment capacity.
When can I refinance my personal loan?
There are several scenarios where you could refinance your loan
- An improved credit score: Your credit score is like your finance report card. There are times when it goes down, but with timely payments and proper money management, you can improve your score.
- Interest rates have dropped: The markets constantly change, and interest rates also change with the ever-changing market. A two per cent drop in interest rate can save you thousands of rupees over your loan period.
- Lower monthly payments: If you cannot keep up with the high monthly payments, refinancing your loan for an extended tenure could ease the load on your monthly outgo. Remember that while this may ease the pocket, you may pay interest over the long run.
Things to remember
Don’t refinance if you’re about to end your loan repayment: If you are at the fag end of your loan repayment, then refinancing may not be financially feasible. The fees surrounding a new loan may mean that any potential savings are dwarfed by the price of a loan when there’s a small amount left to pay.
Overcharges outweigh advantages: Before rushing to refinance, crunch the numbers on all the costs involved. Some lenders will charge a fee for being a new loan, and your existing lender may impose a penalty for prepayment. Add up these expenses to ensure refinancing really saves you money.
If your personal loan already has a competitive interest rate, refinancing may not yield high benefits. It may not even be worth the time and effort to refinance for the slim difference in rates.
Refinancing 101
- Check your numbers: Use an online emi calculator to compare potential new loan terms with your existing ones. This will give you an idea of whether refinancing would actually save you money.
- Talk to your current lender: Call your current lender before shopping around. They may give you better terms to keep you a customer. Some lenders go as far as waiving specific fees for loyal customers with solid payment histories.
- Compare multiple offers: Resist the temptation to take the first refinancing offer you get. Shop rates and terms with various lenders. Don’t just focus on the interest rate — review the fees and terms associated with each offer.
Understand What it Does to your credit
If you apply for refinancing, it will cause your credit scores to dip slightly since every time you apply for a new loan, lenders will conduct a hard credit pull on you. Try to submit your applications as soon as possible within 14 days. This is due to the fact that multiple inquiries in this time period usually counts as just one inquiry on your credit score.
Conclusion
Keep in mind, the refinancing of a personal loan might be a good financial decision but not the best option every time. Think about your particular financial scenario, compute even potential savings and assess all cost factors before deciding. The objective here is to enhance your financial well-being, not make it worse.
