How do I refinance a personal loan?

Yes, you can pay off a personal loan early without a penalty – in most cases, at least. Penalties for repaying a personal loan ahead of schedule are very rare among major lenders. In fact, none of the personal loan providers that WalletHub has reviewed charges a prepayment fee. The purpose of such a fee, when it’s actually used, is to help the lender recoup some of the money it would have earned had the borrower paid interest for the full term.... read full answer

Personal loans generally require payment in equal monthly installments over a set period of time. But paying a personal loan off early can reduce the total cost of the loan by giving it less time to accrue interest. In addition, paying off a personal loan early reduces your overall debt load, which can improve your credit score. Another benefit is that you won’t have to worry about monthly payments anymore or have the stress of a loan hanging over your head for longer than necessary.

So paying off a personal loan early is good, provided you don’t get charged a fee. And it’s always wise to confirm that before submitting payment ahead of schedule. But even when there’s no fee, make sure that you can actually afford to pay off the loan early.

For example, if you have extra cash you could use to pay off the loan but do not yet have an emergency fund for unexpected expenses, it’s better to use the money to establish an emergency fund. And there may be additional situations where there’s something more urgent to use the money for than early loan payoff.

The best way to lower the interest rate on a personal loan is by refinancing the loan with another lender. When you refinance, you use a new loan or line of credit with a lower interest rate to pay off the old loan, so you owe the old balance to the new lender. And since interest won’t be accumulating as quickly, you should be able to pay off the new loan sooner, assuming your monthly payment stays the same or increases.... read full answer

But some borrowers may also find success simply asking for a lower rate. Asking for a rate reduction is the easiest route, as it doesn’t require applying for a new financial product. It’s just less reliable. Still, it’s a good idea to pursue both paths at once – pre-qualify for some refinancing options and then mention their rates when negotiating. If the original lender won’t offer a cheaper rate, then refinance.

How to Get a Lower Interest Rate on a Personal Loan:

• Ask for a lower rate. If you call your lender and express concern that your APR is too high, there’s a chance the lender will reduce the rate. That’s especially true if you make it clear that you are experiencing temporary financial distress, that your creditworthiness has improved significantly since you applied, or that you are willing to take your business elsewhere. In any case, it doesn’t hurt to ask.
• Tap into your home equity. You can refinance an existing personal loan with a home equity loan or home equity line of credit, which are secured by your house but tend to have very low interest rates (4% - 8%).
• Take out another personal loan. If you get a lower interest rate on a new personal loan, you can use it to pay off the old one and save money in the long run.
• Move the debt to a balance transfer credit card. Balance transfer cards offer 0% introductory APRs for a certain number of months, and are best if you’ll be able to pay off the remaining balance completely in that time period. You’ll need good or excellent credit to qualify.

Tips for Negotiating a Lower Interest Rate on a Personal Loan

You can pre-qualify for a personal loan or for a balance transfer credit card (but not for home equity products). So if you pre-qualify for a loan with lower rates or a 0% balance transfer card, you can use that to your advantage when negotiating with your lender. If they know you’re thinking of moving your balance elsewhere, they may work with you. If not, you’ve got a good deal to fall back on.

It also helps to have another good reason for why the lender should lower your rate. One example is if your credit score has gone up a lot since you first opened the loan, meaning you’re a less risky borrower now. Another is if you’re having financial hardship (e.g. unemployment, sickness or damage to your home from a natural disaster) and simply can’t afford your payments. Lenders may be sympathetic to these problems and offer you at least a temporarily lower interest rate.

The keys to negotiating with your lender are to be clear about what you want to accomplish, truthful about your situation, and polite to the representative. Ask for copy of any new terms you agree to in writing. And if you’re unable to get a good deal, refinance instead.

It is good to refinance a personal loan if you can get a significantly lower APR because it will save you a lot of money on interest in the long run. Other things that determine whether it’s a good idea to refinance a personal loan include what fees you’ll have to pay and how good your credit score is. Both will affect your ability to save money, which is the point of refinancing.... read full answer

When you refinance a personal loan, you borrow money and use it to pay off the loan, moving what you owe to the new lender. And before you borrow, you should go through a quick checklist to make sure that refinancing is worth your while.

When It’s Good to Refinance a Personal Loan

• When you can get a significantly lower APR. The main purpose of refinancing a loan is to save money on interest. You’re in the best position to get a lower APR if your credit and/or income have improved significantly since you took out the first loan.
• When the fees don’t wipe out your savings. Getting a lower APR is great, but the benefits can be diminished if you have to pay a lot of expensive fees. For example, a big origination fee could defeat the purpose of saving money on your APR.
• When you’re not about to make a big purchase. You want the best credit score possible before buying a car, a house or anything else that requires a credit check. Refinancing a loan right before doing that will drop your score by a few points, which could hurt your approval chances and rates.

In conclusion, it’s good to refinance a personal loan as long as it will save you money and won’t negatively impact your other financial priorities.