Getting a personal loan can often be the best way of spreading the cost of a significant purchase, but if it’s over a long period you might find that better loan rates become available. If that is the case, refinancing your loan might become a viable option.
If you have been thinking about refinancing your current loan, it’s worth doing your research and finding out whether it would be worth it for you. We’ve put together all the information you need to know on loan refinancing to give you a helping hand.
What is refinancing a loan?
- Apply for a new loan
- Pay off an existing loan along with any early repayment fees
- Continue with lower repayments and better interest rate
Refinancing a loan consists of paying off an existing loan you already have and taking out a new one to replace it, all for the purposes of getting a better deal in the long run.
This is normally to get a lower interest rate, meaning you will have less to pay off overall, saving you money whilst your repaying. This process should also reduce your monthly payments if done correctly, making your debts a lot more affordable.
Advantages of loan refinance
- Get a better interest rate
- Reduce your monthly payments
- Better management of your overall debt
The biggest advantage of refinancing a loan is the money-saving aspect of a better interest rate, but you will also benefit from more manageable repayments too.
Ideally your credit score will have improved during the time you’ve been paying off your existing loan, so you will have access to a better loan offer now. It also means you might be able to replace a worse loan like a secured or homeowner loan, with a better unsecured loan that is easier to manage and poses less risk.
Disadvantages of loan refinance
- It could cost more due to early repayment fees
- You will need to submit a new application for a loan
- Risk of reducing your credit score if you don’t check your eligibility first
The most important aspect of refinancing a loan is to do your research and ensure the new loan offer is preferable to the existing one.
You will also need to look into the terms outlined in your existing loan surrounding early repayment. Some lenders will have very strict fees that may outweigh any refinancing deal, meaning it will cost you more in the long run.
If it doesn’t however, you can often get a preferable deal from either the same lender or a different lender if you shop around to compare loans. If your credit score has increased since you got the original loan, chances are you will be able to find a better deal.
Can refinance affect my credit score
The only part of the process that will affect your credit score is the application for the new loan. Like any form of borrowing, you should have a good indication of whether you’d be accepted before you apply, usually through an eligibility checker such as moneymatcher.
It’s also important to keep an eye on your credit report, so you’re able to track any changes in your credit score. If you have effectively managed your existing loan and have no other issues on your credit file, you should have a fairly healthy credit score, giving you access to a better range of loans.
How to refinance a loan
There are several steps to refinancing a loan that you should follow. You should ensure that the new loan is preferable to the old loan and it won’t cost you more money in the long run.
- Try to improve your credit score – start taking steps to improve your credit score, as this will allow you to access better interest rates
- Compare loans – start comparing loans by using an eligibility checker such as moneymatcher to narrow down your search
- Calculate the costs involved – have a look at the terms of your existing loan to see how much it will cost to pay it off early. If it is minimal, then you can proceed
- Apply for a new loan – once you have picked out the new loan with a better interest rate and have checked your eligibility, you can apply for the new loan
- Pay off the old loan – use the new loan amount to pay off the remaining balance on your old loan and continue to repaying the new loan