If you are refinancing, you must redo a new credit check. This can slightly lower your credit score. However, if you are qualified for a lower interest rate, it means quickly pay off your loan. Therefore, a slight temporary impact on your credit rating may not matter in the long run.
On the other hand, a small bump could hurt you if you had to move and rent or buy housing at the same time. Homeowners examine your credit score and refinance your loan at the wrong time, which could make it difficult to find housing. If you have to buy a new car, you need good credit if you want to make monthly payments for the car.
Benefits of Refinancing a Personal Loan
Better interest rate – An improved credit rating could not only help you get a better interest rate on a new loan but also benefit from lower overall rates.
Pay off your loan faster: If you want to make higher monthly payments and want to get out of debt faster, you can refinance a personal loan for a shorter duration. Not only does this help you make fewer interest payments, but you can even get a lower interest rate from the lender.
Extend your repayment period – Extending the repayment of your loan will help you better manage your monthly payments if you have trouble making them on time. On a positive note, you can reduce your monthly payment by withdrawing the term. On the other hand, you also pay more interest to your lender.
Disadvantages of Refinancing a Personal Loan
You can pay additional fees – Each time you apply for a new loan, you may have to pay additional fees from the lender, which will reduce the economic benefits you may want to obtain. Make sure you understand everything about refinancing your personal loan so that you can make the best financial decision.
You can have a prepayment penalty: some loans are subject to a prepayment penalty if you pay the balance before the term expires. Since you have to repay the existing loan when refinancing, replace it with another. Make sure this feature doesn’t hurt you too much.
You can pay more interest: if you extend a loan period, you generally pay more interest over time. If you are trying to reduce your monthly payment due to financial difficulties, you can always consider refinancing. Just understand that lower monthly payment is unlikely to save you money in the long run.
