If you’ve done the math and found that refinancing is in your best interest, here are six steps you can follow to refinance a personal loan.
1. Determine the required loan amount
Before shopping for a new loan, determine how much of a loan you need to pay off your existing loan. To determine how much you will need, contact your current lender or log onto your financial institution’s online platform to see your outstanding balance. You can also check if your lender will charge any prepayment penalties.
A prepayment penalty, also referred to as an early payoff fee, is a fee some lenders charge if you pay off your loan early. If this applies to your loan, you’ll need to consider if refinancing makes financial sense.
2. Assess your credit score and review your credit report
Prior to applying for a new personal loan, review your credit score and credit report to see if you qualify for a lower rate than you are currently paying. You can get a free copy of your credit score from all three major credit bureaus (Equifax, Experian, and TransUnion) by visiting AnnaulCreditReport.com.
You might not want to refinance unless you have a credit score that qualifies you for an interest rate significantly lower than what you’re paying on your existing loan.
Even if you can qualify for a slightly lower rate, you can compare how much you will spend on fees associated with refinancing versus how much you will save before going forward.
3. Compare rates and terms from banks and online lenders
If you feel confident that you can qualify for a loan with a much lower interest rate than you are currently paying, you can begin to compare lenders on rates and terms. This process can help you find the loan that best fits your needs and budget.
You can visit financial institutions in person or online to gather information, or you can use an online marketplace to compare personal loans from multiple providers side-by-side.
4. Have a conversation with your existing lender
While comparing other loan options, you can also contact your existing lender to see if they will negotiate your current interest rate and terms. This could save you from having to go through the process of refinancing and could potentially help you save on fees associated with switching lenders.
5. Submit your loan application
When you’ve selected the lender you want to go with, it’s time to complete a loan application. During this process, you will need to provide personal and financial documents to verify your identity and income. This can include copies of your government-issued ID, paystubs, bank statements, or tax returns.
When applying for a loan, each lender will have their own criteria for determining if they want to lend you money.
6. Start payments on the new loan
Once you receive your new loan, you can pay off your existing loan. Then, it’s up to you to make your new monthly payments with your refinanced interest rate and loan terms.
Many lenders will allow you to set up autopay to automate your monthly withdrawals so you don’t have to worry about missing a payment. Your payment history makes up the largest portion of your credit score, so you want to pay your loan on time, every time.
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