How to refinance your personal loan with a lower interest rate?

October 8, 2021 Mutual Fund

Personal loans provide you instant cash solutions to help you during emergencies. It is very helpful during a financial crunch because it can be availed of with minimum documentation and do not require any collateral. Many banks are now offering instant personal loans that are available online and can be availed within a few minutes to specific customers. We generally avail of a personal loan when we require funds immediately. Many of us do not research well and in a hurry opt for a lender that offers the loan quickly. However, we realise later that the hefty EMIs are actually draining our pockets. Unfortunately, many of us are not aware that we can refinance personal loans and save a lot of money. This article will elucidate exactly how to refinance personal loan.

What is Personal Loan Refinancing?

Refinancing a personal loan means nothing but replacing your existing personal loan with a new one that offers a lower rate of rate of interest or better terms or both.

Why to opt for a Personal Loan Refinancing?

• Lower Rate of Interest:

  If a new lender is offering a considerably lower rate of interest than your existing interest rate, it makes sense to refinance your personal loan. The interest rate on personal loans is usually higher compared to other loans. Hence even a slight reduction in interest rate can lower your EMIs.

• Change the Loan Tenure:

  If your income has increased substantially and you are able to pay a higher EMI each month then it is a good idea to refinance your existing personal loan. With a new lender, you can choose a shorter loan tenure and pay higher EMIs to clear off the loan early. On the contrary, if you are facing a difficulty in paying your existing EMIs, then in that case, you can refinance your personal loan and choose a longer loan tenure with lower EMIs.

• Improved Credit Score:

  Banks and NBFCs generally charge a higher rate of interest and a processing fee for the applicants with an average or poor credit score. If you have availed of a personal loan when your credit score was below 'good', you are possibly paying more on the interest amount. However, if you have been timely paying your EMIs and your credit score has improved over the period of time then the new lenders will offer you a lower rate of interest and processing fee.

• Facility of Top-Up Loan:

  If your loan eligibility has increased over time with an improved credit score then the lenders will also offer you a top-up loan. In simple words, you can get a loan of more than your due amount. The top-up loan facility can be very helpful when you are in need of more funds during emergencies. However, it is necessary to keep in mind that the lenders will offer a top-up loan facility only if you are eligible for the increased loan amount.

• Change the Loan Terms:

  You can choose to refinance your personal loan to make changes in the loan terms. For example, if you are paying a floating rate of interest on your existing personal loan and if that is affecting your monthly budget, then you can choose a lender that offers a fixed rate of interest which works in your budget.

• Add or Delete a Co-Applicant:

  It is possible that by achieving the different milestones in your life, you might get someone to support your finances or you might lose someone who had been supporting your finances. Refinancing your loan comes with different terms and conditions in comparison to your existing loan. Hence, it is possible to add or delete the co-applicants from your personal loan by refinancing it.

Benefits of Refinancing Your Personal Loan:

• Lower rate of interest

• Top-up loan

• Shorter or Longer loan tenure

• Better loan repayment terms

• Changes in the loan/interest type

• No security is required

• Less documentation and paperwork

What are the things you must know when refinancing a personal loan?

Although personal loan refinancing has various benefits, in order to make an informed decision, it is essential to know certain things when you opt for it:

• When you refinance your personal loan, you have to close the present loan with your existing lenders, who might charge you a foreclosure fee as per their terms and conditions. Moreover, you will also have to pay a processing fee, documentation fee, etc. to your new lender. Therefore, it is necessary to get the information about all these charges in advance from both the lenders and calculate if the amount you are saving by opting for refinancing is substantially more than the charges you are paying. It is advisable to continue with the existing lender if the difference is not considerable.

• The new lenders will approve your refinancing application only if you have a good credit score. Therefore, make sure you have a high credit score before applying for refinancing. Furthermore, even if your personal loan refinancing application is approved with an average credit score, the lenders will probably charge you a higher rate of interest. However, refinancing is helpful only when you are able to save some money.

• Personal loan refinance is the same as availing of a different loan with different terms and conditions. Make sure you check and understand all the clauses before opting for it. Ensure that there are no hidden charges and clauses.

• Personal loan refinancing can be beneficial to you when you are in an early stage of your loan tenure. If you have already paid the major portion of your personal loan, it does not make sense to refinance it as the cost of refinancing the loan will be higher than the benefits you get out of it.

• As refinancing your personal loan is as good as a new loan, the new lender will ask for the necessary documents. Make sure you keep the required documents, like identity proof, address proof, income documents, etc. ready beforehand.

How to Refinance your Personal Loan?

So, after reading all the benefits and things you must know how to refinancing your personal loan; if you think the refinancing option interests you, here’s how to apply for it:

1. Figure out how much amount you are going to need to clear off your existing personal loan and whether you need any top-up loan.

2. Check your credit score and ensure that you are eligible for a new loan with an improved credit score.

3. Do your research and compare the different interest rates and loan terms offered by different lenders.

4. Try to negotiate on interest rate with your existing lender if the only reason for refinancing is to get a lower rate of interest. If you have a good credit history then they can consider your request and reduce the interest rate, which will save the charges involved in the refinancing.

5. If your existing lender is not ready to negotiate then in that case, you can apply with the lender you have shortlisted after the comparison. Before applying, make sure you read the fine details of the loan agreement and are agreeing to them. You may apply online by visiting their official website or visit the nearest branch for an offline application.

6. The new lender will inform you about the necessary documents to be submitted. Make sure you submit all the required documents within the stipulated time, which will ensure you a faster loan approval.

7. Upon completion of all the formalities, the lender will inform you about your loan status.

8. If your loan application is approved, close the existing loan by clearing off the dues and start repaying your new personal loan with the new lender.

This article first appeared on PersonalFN here