How To Refinance A Personal Loan
Let’s take a look at how to refinance a personal loan, step by step.
1. Check Your Loan Amount
First, check the exact amount you need to borrow on a new personal loan to pay off your original loan(s). Check on the total loan amount due as well as other major costs or fees that you may incur for paying off your original loan and securing your new loan, such as origination fees you may need to pay with your new lender. Origination fees are those charged by a lender to process a new loan application.
2. Check Your Credit Score and Credit Report
It’s important to understand your credit score before refinancing because your credit score directly affects your interest rate. A credit score is a three-digit number that shows how well you handle debt. In order to get a preapproval for a loan, your lender may do a soft inquiry on your credit.
A hard inquiry, on the other hand, occurs when you give someone permission to check your credit. If you have poor credit, you may want to work on improving your credit score before refinancing so you can get the best interest rate possible on your personal loan refinance.
You can pull your credit report to check over your credit history. This is a summary of how you handle credit and to check for any inaccuracies prior to applying for a refinance. It’s a good idea to correct any errors before refinancing for the best results.
You are entitled to a free credit report every year from each of the three major reporting companies – Equifax®, Experian™ and TransUnion®. Report any errors to each reporting company prior to prequalifying for a new loan.
3. Prequalify For A New Loan
After checking your credit reports for errors, you can prequalify for a new personal loan. This is considered a soft credit pull, which won’t affect your credit score. You will need to provide some information, such as your name, address, income, Social Security number and birthdate. Once preapproved, your lender will share rates, terms and personal loan amounts with you.
4. Compare Lenders and Loan Terms
Compare lenders and loan terms carefully. Banks and other lenders may offer different rates. Check for various fees associated with refinancing (such as origination fees) and how you might pay for them over the course of your loan term.
Note that you may want to contact your current lender to renegotiate the terms of your original loan, especially if you’ve enjoyed working with your current lender.
5. Apply for A New Personal Loan
Finally, you’ll need to apply for your new personal loan, which may require you to supply your lender with your bank account information, identification, pay stubs, bank statements and more. Your lender will also ask permission to do a hard credit inquiry, which can deliver a small hit to your credit score. Your new lender will then pay off your old loans and you will eventually start payments on your new loan.