How To Refinance A Personal Loan
Mumbai, October 28, 2020
Repaying a loan involves borrowing a new loan and using that money to repay an existing loan. You can refinance your personal loan at any time, but it is very beneficial for borrowers who have improved their repayment history and have a good credit score since they can get the loan at a comparatively lower interest rate.
Refinancing a personal loan can also be a good way for people who want to reduce their monthly payments by extending the loan period. Keep in mind that re-financing often comes with a processing fee and may result in a dip in your credit score. You may also be charged a prepayment or foreclosure fee from the first lender.
With no restrictions on their loan agreements, borrowers can often refinance personal loans as soon as they start repaying. However, there are cases when refinancing can prove to be very beneficial for the borrower.
Consider refinancing your loan only if:
● Lender is offering you lower interest rates based on a high credit rating or a favourable lending environment. You can get access to Low interest rates depending on your current credit score and repayment track record.
● You want to reduce your payments.
● If you want to make a balloon payment but you cannot - or do not want to pay.
● You may be able to switch from a variable - to a fixed rate loan
The repayment process varies from lender to lender. However, it is very similar to the regular loan application process. Follow these steps to refinance your own loan:
1. Know your Credit Score
When refinancing a personal loan, consider your credit score. You can take the help of your financial institution for this. You can also check your Score for free on Finserv MARKETS through the Financial Health Credit Report (FHCR). Higher scores will give you access to more appropriate terms - such as lower interest rates.
If possible, familiarize yourself with your credit score and history before planning for refinance. This way, you will have time to make improvements — such as reducing your credit limit — before the lender makes a serious credit check.
2. Know your Loan Terms
When you have a good credit score, research traditional and online lenders for refinance. Start by contacting your current lender. Your current lender should be able to tell you the balance on your loan, so you know how much to borrow. Next, contact the local banks and online lenders to compare interest rates and other loan terms.
3. Apply for Loan and await underwriting
Once you have selected a lender, collate all the details and documents required by the bank to complete your application. This may include copies of your latest bank statement, salary slips or Statement of account of ongoing loan. However, the specific requirements of the application will vary from lender to lender. After your loan application is submitted, you can get approval within an hour or days.
4. Repay your original loan
After the new loan is approved, use it to pay off your original loan balance. Depending on the terms of your original loan, you may also be liable for a prepayment fee. Finally, wait for the confirmation from the lender, that your account has been closed, so that you can avoid further charges and penalties.
5. Start Making Payments with New Loans
After repaying and closing your original loan, start paying regularly for the new loan. If possible, sign up for an instant payment, so you don't have to miss out on monthly payments. Regular, timely payment will help you recover any damage done to your credit points during the application process for refinancing and can help you build your credit history in the long run.
Use the Personal Loan Calculator to determine savings
It can be difficult to determine if a loan refinancing is your best option. However, a personal loan calculator can make it easy to balance your monthly and total payments, so you know what to expect. Loan calculators make it easy to compare multiple loans when buying the best words. The Personal Loan EMI Calculator on Finserv MARKETS will help you calculate the EMI and manage your finances better.
How getting a personal loan affects your credit score
Refinancing a personal loan can affect your credit score in many ways: First, repaying a loan requires a bureau or credit history check, which can negatively affect your score. However, this is often a minor dip and outweighs the benefits of refinancing. Just make sure you get your loan disbursed within 14 to 45 days of the application process - so that the credit bureau will consider a single application only for reporting purposes.
Your credit score can also dip by a few points when your original loan account is closed due to refinance. However, the effect of closing this account will depend largely on when the original loan is started in respect of your outstanding debts and whether it has a good repayment track record.
When should you avoid Refinancing a Personal Loan
● Lenders typically charge processing fees up to 5% of the loan amount. If paying higher fees doesn’t compensate for the benefits of refinance, avoid refinancing.
● You may have to pay prepayment penalties on your original loan. If the repayment fees are high, avoid refinancing.
● Most lenders require a hard credit inquiry, which can negatively impact your credit score. If your credit score is low, avoid refinancing, so as to reduce further dip in your credit score.
● By extending your loan term, you will have to pay more interest over time. If paying more interest doesn’t compensate for the benefits of refinance, avoid refinancing.
If you wish to avail a Fullerton Personal Loan for refinancing, head to Finserv MARKETS today. You can get loans of up to Rs. 25 Lakhs with benefits like flexible repayment tenure, zero hidden charges and much more.
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