A Complete Guide to Refinancing your Personal Loan

November 19, 2021 Mutual Fund

Two years back, my friend Samir had taken a personal loan of Rs 10 Lakhs for his mother’s surgery. Since it was an emergency situation, he couldn’t do proper research and took the pre-approved loan offered by a Non-Banking Financial Company (NBFC). Although he had received the amount instantly, the rate of interest offered by the lender was 17% p.a., which was much higher compared to the competitive rate of interest. However, with a good credit history and credit score, Samir was recently offered a Personal Loan Refinance facility by a leading bank at the proposed rate of interest of 11.50% p.a. With the new rate of interest, Samir will be able to save a substantial amount on the total interest outgo.

Personal loans can be very helpful in an emergency or during a financial crunch because they can be availed of with minimum documentation and do not require any collateral. Many banks and NBFCs are now offering instant personal loans online that can be availed within a few minutes. However, repayment of personal loan EMIs can put a dent in your budget and other financial goals because of its high rate of interest and charges.

Personal Loan Refinancing is nothing but replacing your existing personal loan with a new one that offers a lower rate of interest or better terms or both. It is advisable to consider refinancing your personal loan if you could get a better rate of interest or longer loan tenure that lowers your monthly EMI burden.

When should you consider refinancing your existing Personal Loan?

1. To Get a Lower Rate of Interest:

It makes sense to refinance your existing personal loan if a new lender is offering a better rate of interest than the current rate. Since the rate of interest on personal loans is usually very high, even a slight reduction in the rate of interest can make a considerable saving on the interest outgo. However, before opting for personal loan refinancing, you should check the cost-benefit it could provide and if the hassle of refinancing is worth it.

2. To Shorten or Increase the Loan Tenure:

Most banks and NBFCs do not let you change your personal loan tenure. However, there could be times you need to shorten or increase the personal loan tenure. For example, with an increased income, the ability to repay loans also increases. In such a case, you can opt for a shorter loan tenure and pay higher EMIs to clear off the loan early. On the contrary, if your income has reduced and you are facing difficulty in paying your EMIs, you can choose a longer loan duration and make the EMIs more affordable.

3. When Your Credit Score Improves:

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 may offer you a lower rate of interest and processing fee.

4. To Avail of a Top-up loan:

As your credit score improves over time, your loan eligibility also increases and the lenders will offer you a top-up loan which is an additional loan over your existing loan. In simple words, you can get a loan of more than your due amount. If you are in need of more funds, you can opt for personal loan refinancing to take more amount of loan. 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, provided you have a good credit score and ability to pay higher EMI.

5. To 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 that works within your budget.

6.To 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.

What are the benefits of Personal Loan Refinancing?

• You can save a substantial amount of money on the interest outgo.

• You can shorten or increase the loan tenure as per your need.

• You can avail of more loan amount by opting for a top-up along with refinancing.

• You can change the type of interest from floating to fixed, or vice versa.

• You do not have to provide any collateral as it is an unsecured loan.

• Personal loan refinancing requires less documentation and paperwork.

What are the things you should consider while refinancing a Personal Loan?

While there are many benefits of personal loan refinancing, to make an informed decision, it is essential to know certain things before availing of refinancing:

1.Hidden Charges:

When you refinance a personal loan, you have to close your existing loan. Your present lender might charge you a foreclosure fee as per the terms and conditions of your loan agreement. 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 hidden charges in advance from both the lenders and calculate if the amount you are saving by opting for refinancing is substantially higher than the charges you are paying at present. It does make sense to continue with the existing lender if the difference is not considerable. Refinancing the loan with higher charges mean that you will have to pay more.

2.Cost-benefit Analysis:

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 is going to be higher than the benefits you get out of it.

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 more money.

3.It is a New Loan:

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

As refinancing your personal loan is as good as a new loan, the new lender will ask for the necessary documents. Make sure that 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 before 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. Knowing the exact amount which you have to pay can help you plan it well.

2. Check your credit score and ensure that you are eligible for a new loan with an improved credit score. It will even help you negotiate better rate of interest with the new lender.

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. While applying, make sure you read the fine details of the loan agreement before 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 that you submit all the required documents within the stipulated time, which will ensure you faster loan approval.

7. The lender will inform you about your loan status after you complete of all the formalities.

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.

To Conclude:

The bottom line is that if you want to refinance a personal loan then compare the pros and cons along with the interest amount and other charges which you have to pay. Personal loan refinancing can save a substantial amount of money if you are currently paying a high rate of interest. However, before applying for refinancing, it is advisable to assess whether your loan eligibility has improved as the lenders will offer you better loan terms only if you have a good loan repayment capacity. Moreover, it is also necessary to shop around for the best deals. If your existing lender is ready to match the new loan terms offered to you, it makes sense to continue with your existing lender to avoid the hassle of refinancing the loan.

This article first appeared on PersonalFN here