Are you thinking about refinancing your loan? This strategy involves paying off your original credit with a new one in the hope of qualifying for lower interest rates.
Borrowers whose credit scores have experienced an improvement in recent times opt for refinancing to save on interest. This procedure consists of multiple steps, such as shopping for terms, submitting an application, and underwriting. There are various helpful sites, such as refinansiere-net, helping individuals compare different refinancing options.
The tips below will guide you through the process of refinancing.
Table of Contents
Figure out the amount of money you need
The first step toward refinancing a personal loan is calculating the sum you’ll need to cover the existing credit. This information can be obtained by having a conversation with your lender in order not to make any mistake in the calculations. It’s crucial to get informed about any potential prepayment penalties you might face by taking such a step.
Moreover, these penalties refer to the fees you’ll be charged by the lender in the event of paying off the loan early. Regardless of how illogical prepayment penalties sound to you, moneylenders use them to collect the interest for the full term. These fees are calculated based on the credit’s principal and the interest that remains to be paid off.
Check your FICO score
The following task in your refinancing journey is checking your FICO score by contacting your bank or credit card issuer. This score is what makes you qualified for getting a lower interest rate on your new loan. If your credit score isn’t good enough to help you earn a lower rate, the refinancing process might not even be worth it.
The majority of moneylenders consider scores of 660 suitable for refinancing. Nevertheless, even if your score is below 600, as low as 580, you still have good prospects for a personal loan refinance. If possible, start the process of checking your FICO score and credit history months before the application. It will give you enough time to make the necessary improvements. Click here to check out four ways to boost your credit score.
Shop for terms
Research is of vital importance for refinancing personal loans, involving a comparison of rates and terms from various lenders. The initial thing to do is getting in touch with your current lender to check the possibilities for refinancing. Even if this money lender is willing to refinance your credit, continue your research by contacting the other local banks and lenders.
After gaining insight into their interest rates and loan terms, start the process of comparison. The interest rates usually range between 3.5 % and 30%. Anyhow, a new credit with lower interest isn’t necessarily a better choice if the overall fees are higher or the maturity of the loan is extended. There is no benefit of paying a lower interest rate if you have to pay it over a longer timeframe.
Bear in mind that the refinancing procedure might involve additional costs, which would alter the loan terms. The most important fees to take into account are the prepayment penalties, as these determine whether refinancing makes sense or not.
Apply for a new loan
Once you’ve made your choice of lender, it’s time to commence the application process. In order to submit an application, you will have to gather the required documentation in the form of social security number, recent paystubs, recent bank statements, and tax return documents.
The application requirements aren’t universal but vary across moneylenders. Make sure to contact the lender prior to submitting the paperwork so as not to miss any important document and get the application rejected. Self-employed individuals might be required to provide income documentation in addition to the other paperwork.
Underwriting
The underwriting process takes place after the borrower submits the application. In the course of this process, the job of lenders is to verify the financial information provided by applicants to ensure it’s accurate. Moneylenders comb through every detail to decide whether a particular candidate is genuinely qualified for getting his/her personal loan refinanced. Applicants usually wait between several hours and a few days for the process of underwriting to get completed.
Start making payments on the new loan
Once your application gets approved, you’ll receive the funds from the new credit. Waste no precious time and use them to pay the original loan off. The longer you wait, the higher the likelihood of paying unnecessary interest and handling double loan payments.
The moment you receive the new funds, the repayment period of the new credit begins. The monthly payments will be in compliance with the new interest rate, the new timeline, and the installment amount. Some borrowers prefer to sign up for automatic payments in order not to skip any because of absentmindedness.
Does refinancing a personal loan affect one’s credit score?
The procedure of refinancing a loan has a tremendous effect on the credit scores of borrowers. For example, this procedure requires a hard credit check, which is detrimental to the score. Also, when the original credit is closed, the score tends to drop as well. Fortunately, by making regular payments, your FICO score will be improved once again.
Final thoughts
It’s important to be sure of the benefits of refinancing in your case.
If the process makes no sense, you shouldn’t give it a try.
Consult your current lender for advice!
