Personal loans can be more expensive than other loans. This is so because the specifics of personal loans — like how much you can borrow and the rate at which you can borrow — will be determined by your creditworthiness.

But an increase in your credit score or improvement in your financial situation could change that, according to gobankingrates.com.

If you’ve previously taken out a personal loan, but think you could get a better interest rate or lower monthly payment, you should consider refinancing. Refinancing a personal loan can help you get a better interest rate, which can save you money. Other benefits come with a refinanced loan, too — like changing loan terms or monthly payments to accommodate your financial needs.

According to gobankingrates.com, here’s how to refinance so you can get the best personal loan rate.

How do I refinance a personal loan?

To refinance a personal loan, you need to follow the same steps you’d take to qualify and apply for a personal loan: work on optimising your credit, finding the right lender and researching loans. Once you apply for and are approved for the refinance, you’ll get the new loan, close out your old loan and start making payments on the new one.

These are the five steps you need to follow to refinance your personal loan:

  1. Improve your credit

Before you begin to negotiate a refinance of your personal loan, ask yourself, “Should I refinance?” If your credit history has improved enough for a refinance, it’s probably a smart idea.

For example, if your credit score was less than stellar when you took out the loan in the first place, and you’ve been making your monthly payments on time, your credit could have improved. Your lender will also review your payment history as a whole to make sure that you’re a safe candidate for a refinance.

If you continue making payments on time throughout the refinancing process and your credit score continues to improve, you’ll be in a much better position to ask for loan refinancing. Demonstrating that you’re a safe investment for the lender will go a long way towards the lender’s willingness to negotiate a refinance; so this is one of the most important things you can do throughout the course of the refinancing process.

  1. Compare offers from banks

Once you have reviewed your finances and have boosted your credit score, it’s time to contact your current bank for offers. Make the lender aware that you want to refinance but that you are willing to go to a different lender if the new personal loan interest rate isn’t appealing. You can receive a loan estimate as well as tell which loan rates are fair using a free loan calculator. If you feel that your current lender is trying to sell you short, don’t hesitate to submit a loan application for a personal loan — sometimes called unsecured loans or signature loans — to other possible lenders.

Compare offers from several different banks to decide which is best. Once you narrow the offers down to one or two that you prefer, go back to your original lender and give them the opportunity to match the competition’s offer — or better it. If you’re an appealing candidate for a loan, your bank might be willing to give you better terms in an attempt to keep your business.

  1. Consider online banks or P2P lending

If neither your current bank nor a competitive bank offers an appealing rate, you might apply for a personal loan from a non-traditional lender. The first thing you might look into is an online bank. There are a number of firms offering personal loans online in Nigeria now. Personal loans from online banks typically have lower refinancing rates than traditional banks offer because of the lack of overhead costs. A traditional brick-and-mortar bank will charge more to accommodate the cost of tellers and other expenses, whereas an online bank lacks tellers and branches, thus eliminating the need for extra money and lowering the fixed interest rate of your loan. More online banks will emerge in Nigeria soon. However, there are a number of what can be called retail lending firms around now. You can explore.

You might also consider borrowing from a peer-to-peer lending group, in which individual people give loans to borrowers. Investors join P2P lending groups and earn money from the interest they receive from their loans. These loans will typically have lower refinance rates than a traditional lender as well, due to the lack of overhead costs.

  1. Review your loan and ask questions

As with most loans, refinancing your personal loan can take a lot of work and be a long process. This means that you’ll need to fill out plenty of paperwork and review everything before you move on to finalising the loan. The time it will take to do all this will be even longer if you’ve signed with a new lender, as opposed to sticking with your old lender.

You’ll need to provide and confirm quite a bit of information at this stage, like your credit report, proof of income, assets, debt and other financial information. You should also ask the lender a number of questions about your loan so you stay informed. The questions you should ask your lender include the following: Is there an application fee? What is my repayment period? Are there any repayment penalties? Are there any limitations on how I can use the money from the loan? Are there any hidden fees? You also need to find out whether there are penalties for paying off a personal loan early.

  1. Close out your original loan

After you’ve been approved for refinancing, it’s time to officially finalise the loan by signing off on the loan papers. You should also make sure that you’ve closed out your old loan. If you re-signed with your old lender, the lender will have closed out the old loan for you. If you’ve signed with a new lender, it’ll be up to you to close out your old loan. No matter who you’ve signed with, closing your old loan is a critical step — failure to close the loan or mistakes in closing it could be costly.

How to refinance your personal loan

Refinancing your personal loan could help you save money on costly interest. How does personal loan refinancing work? If you’re overwhelmed with how much your loan is costing you each month, then you may need to consider refinancing.

Refinancing a personal loan works much like refinancing a mortgage: You apply for a loan to cover the amount remaining on your current loan. Once accepted, you can use the funds from the new loan to pay off the other one.

When refinancing, you’ll still carry the same amount of debt, but you could save money under better terms, a reduced interest rate or lower fees.

Is refinancing the same as debt consolidation? Not exactly. Although they work the same way, consolidating involves paying off multiple loans at once while refinancing only deals with one loan. You may sometimes see the two used interchangeably though.

Why should I refinance my personal loan?

People choose to refinance their personal loans for many reasons, but it boils down to either finding a better deal or consolidating debt, according to www.finder.com

You’ve found a better deal.

If you think you’ve found a better deal, consider using a personal loan repayment calculator to compare the two loan options and see if the move is worth it. When comparing loans, focus on interest rates but also look at ongoing fees and repayments as well as loan establishment costs. You could get a better idea of the total cost of the loan by evaluating the APR. Consider the features of a loan to make sure it suit your needs — for example, if you’d like the freedom to pay off your loan early, confirm there’s no prepayment penalty.

You want lower payments.

If you’d like to pay less each month on your personal loan, you could refinance it to extend the repayment period. Simply find a loan with a longer term. Once approved, you can use those funds to pay off your existing personal loan and then enjoy paying less each month on the new one. Keep in mind that lower monthly payments usually means more in total interest over the life of the loan.

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