If you’ve taken out a personal loan to accomplish goals like consolidating debt or renovating your home, you’ve likely locked in an interest rate and term. This doesn’t mean that your original terms should stay the same until you pay off the loan in full. You can refinance your personal loan and get better terms.
Maybe you’ve improved your credit score since getting your original loan. Or you may have found another lender who charges a lower rate or lower fees.
Refinancing can also be a good idea if you want to extend your tenure and make lower monthly payments, or shorten your tenure and pay less total interest.
Whatever your reasoning, there are three important steps to refinancing a personal loan.
1. Review the terms of your personal loan to compare lenders
Before refinancing your personal loan, you should review your current tenure, your APR, and any associated fees. Write down your monthly payment amount and your total remaining balance. Whether you stay with your current lender or go with another option, a full understanding of your situation will help you determine what is the best deal for you.
Additionally, check the company’s Better Business Bureau score to make sure it hasn’t changed since you first took out the loan, and reflect on your experience with the lender. The BBB assesses a company’s reliability by measuring a company’s responses to customer complaints, honesty in advertising, and openness about business practices.
If you can lower your interest rate without paying any additional fees, it may be in your best interest to take out this offer. However, some lenders charge a origination fee when you refinance and take it out of your loan proceeds. In this case, you will need to do some additional calculations.
“You have to factor in the cost of these fees when determining whether or not it makes sense to refinance,” Todd Nelson, senior vice president of strategic partnerships at Lightstream, told Insider. “You have to think about how much money you’re going to save over time with that lower interest rate, and if it offsets you for any fees you have to pay up front.”
Once you have all the information you need about your current loan, shop around and see what rates and terms you might be entitled to from other lenders.
If you want to find a comprehensive list that compares many lenders, check out our guides to the best personal loans online, the best small personal loans, and the best personal loans for bad credit.
2. Prepare for the application process
The process of applying for a loan refinance will be quite similar to your experience the first time around.
The lender will ask you for basic information and you will have to go through the same selection process as when you got your original loan. Minimum credit scores vary by lender, but most companies take your credit rating into account when making an approval decision. Most lenders will do a flexible credit check to provide you with personalized rates.
Some common information you may need to provide includes:
- Last name
- Reason for requesting a personal loan
- Contact details, including your address, phone number and email
- Date of Birth
- Social Security number
- Reason for taking out the loan
- Employment status
- Whether you are a tenant or owner of your home
- How much you pay for housing each month
- Individual income
- Household income
3. Apply for refinancing from your new lender
Once you’ve done your homework and compared the rates, term lengths, and fees, it’s time to make a decision. You can refinance with your current lender or buy one with better terms.
The lender you choose will likely ask you to provide documents like pay stubs, bank statements, W-2s, and employer details to verify your identity and finances.
“One of the benefits of a personal loan is that it’s one of the simplest financial products,” Ibo Dusi, COO of Payoff by Happy Money, told Insider. “There is an interest rate that determines the cost of financing and there is usually a set-up fee, but some lenders don’t. Other than that, no other fees are common, either for the first time or for refinancing. “
The refinancing process is similar to how you get your original loan. Just make sure you compare rates and understand the terms you are agreeing to before making a decision.
Ryan Wangman is a review officer at Personal Finance Insider and reports on mortgages, refinancing, bank accounts, bank reviews, and loans. During his past personal finance writing experience, he wrote on credit scores, financial literacy, and homeownership.