If you're currently working on paying off a personal loan, you might wonder whether a personal loan refinance is a good option to help you save money or simplify your budget. Refinancing a personal loan means taking out a new loan to pay off your existing one, ideally with better terms, such as a lower interest rate, reduced monthly payments, or a different repayment timeline.
However, there are pros and cons of refinancing a personal loan to consider before you make this financial move. Service Loan South is here to help you make the right decision based on your financial goals and credit situation.
What Does It Mean to Refinance a Personal Loan?
Refinancing a personal loan involves replacing your current loan with a new one, either with the same or a different lender. To pursue a personal loan refinance, you should apply for a new loan with better terms. Once you're approved, your lender will either pay off your existing loan directly or deposit the funds so you can pay it off yourself. Then, you'll start making payments on your new loan with an updated rate and repayment timeline.
For example, let’s say you have a $5,000 personal loan at an 18% interest rate, and you've improved your credit score since taking it out. If you refinance with a loan that has a 12% interest rate, you could save hundreds of dollars over the lifespan of your loan or get lower monthly payments, depending on the repayment term.
The Consumer Financial Protection Bureau (CFPB) recommends that borrowers thoroughly understand how refinancing affects their credit and total interest paid before choosing a loan refinance.
When Refinancing a Personal Loan May Make Sense
A personal loan refinance may make sense for a number of reasons, such as the following:
- Interest rates have dropped
- You’ve improved your credit score
- You need lower monthly payments to fit within your budget
- You want to consolidate your debt to simplify budgeting
According to the CFPB, it’s wise to compare total loan costs, not just monthly payments, before choosing a new loan offer.
Pros and Cons of Refinancing a Personal Loan
Now, let’s look at the specific pros and cons of refinancing a personal loan to help guide your decision.
Pros:
- Potentially a lower interest rate and monthly payments
- A simplified repayment process, especially if you are consolidating loans
- Greater potential to improve your cash flow and have more cash available to use
Cons:
- Could extend your total loan repayment period
- Possible origination and processing fees with the new loan
- A hard credit inquiry that could temporarily impact your credit score
While weighing these pros and cons of refinancing a personal loan, consider the CFPB’s advice to carefully compare terms before committing to any new loan.
Can You Refinance a Personal Loan with Bad Credit?
Yes, refinancing a personal loan with bad credit is definitely possible. However, it may be more difficult, involve higher interest rates, or require a cosigner. The FDIC recommends improving your credit before applying for a new refinance loan to increase your chances of qualifying for better terms and rates.
However, even if your credit isn’t perfect, you can still rebuild your credit with consistent, on-time loan payments and open the door to worthwhile refinancing options in the future. Refinancing a personal loan with bad credit is a viable option for many people, and we regularly assist with it in our Service Loan South branches.
How to Refinance a Personal Loan Step-by-Step
Now, in practical terms, here are the steps involved in refinancing a personal loan:
- Check your credit score and improve it if you can
- Review your current loan balance and understand what the payoff terms are
- Compare loan offers from multiple lenders using the APR, not just the interest rate
- Apply for a new refinance loan and assess the impact on your credit
- Use your new loan funds to pay off your old loan
- Confirm that your old loan is fully paid off and closed
As you start the process of personal loan refinance, it’s also helpful to follow the CFPB’s checklist for evaluating loan offers.
When Refinancing May Not Be the Best Choice
However, some people find that this approach is not the best fit for them as they learn more about the pros and cons of refinancing a personal loan.
For example, you might want to avoid refinancing a personal loan if the fees associated with taking out a new loan outweigh the future savings you’ll receive. If you’re nearly done paying off your current loan, it may not be worth it to refinance at this late stage in the repayment process. Also, if your credit or income has dropped since you took out your current loan, you may not benefit from refinancing now.
The CFPB notes that refinancing a loan can sometimes lead to paying more overall interest, even when payments are less each month.
Alternatives to Refinancing a Personal Loan
If you’ve carefully evaluated the pros and cons of refinancing a personal loan and decide it’s not right for you, there are other alternative options to look into.
For example, if your budget allows, you could start making extra payments on your current loan to pay it off faster. You could also contact your current lender to negotiate new, better terms.
Another idea is to take out a smaller personal loan, like the $500 to $1,500 ones we offer at Service Loan South, for temporary relief from a financial hardship. There are also financial counseling resources available through the CFPB and FDIC if you need help with budgeting and money management.
Why Choose Service Loan South?
Service Loan South is a trusted, reputable lender that understands the real and unique financial needs of individuals and families in our region. To us, you're not just numbers on paper or a source of monthly payments to collect. You are a valued community member who deserves friendly one-on-one support, transparent loan terms with no surprises, and flexible repayment options you can stick with.
We have a proven track record of helping people like you rebuild their credit and achieve financial stability. We help borrowers manage their finances responsibly and offer quick, convenient ways to apply for a loan online, by phone, or in person at one of our many branches.
If you’re thinking about refinancing a personal loan to take control of your finances, please contact us today to explore the best loan options for your needs.
FAQs About Refinancing a Personal Loan
In conclusion, here are some of the most common questions our customers ask us about refinancing a personal loan. If you have additional questions, please call or visit a Service Loan South branch near you.
Can you refinance a personal loan?
Yes, you can refinance a personal loan, and we regularly help customers with this at our Service Loan South branches. We can help you replace your current loan with a new one that offers different terms, ideally with a lower interest rate or lower monthly payments, to suit your financial situation better.
What happens when you refinance a personal loan?
When you choose a personal loan refinance, your new lender will pay off your existing loan so that you can start making payments on your new one instead. Refinancing a personal loan is a valuable financial tool that has helped many people live the simplified, affordable lifestyles they want.
Is it a good idea to refinance a personal loan?
It can be a good idea to refinance a personal loan; however, the decision to refinance depends on various factors. If refinancing lowers your interest rates or makes your monthly payments more manageable, it could be worth it. However, it's crucial always to weigh the pros and cons of refinancing a personal loan to ensure that the outcomes align with your current and future goals.
