When you avail a personal loan, the lender checks your credit score and repayment creditworthiness, and lends you money at a certain interest rate. However, there is a high possibility that during the tenure, you can find other lenders offering a lower interest rate for the loan. This could be due to a fall in the interest rates or an increase in your credit score. However, this does not mean that you are stuck with your interest rate. Instead, you can switch your personal loan. But will it really help you reduce your repayment burden?
What is a personal loan?
A personal loan is an amount of money that you can borrow from a bank or financial institution. With a personal loan, you can meet your varied needs, be it debt consolidation, wedding expenses, travel plans, medical emergency, home renovation etc. One of the most significant benefits of a personal loan is its flexible repayment facility. You can choose a tenure between one to five years and repay the loan as per your financial comfort.
How does personal loan refinance work?
When you plan to refinance your personal loan, you need to apply for a new loan. You can do so with the same lender or a different lender. You can use the loan amount to repay the old personal loan at the new interest rates and terms. By refinancing your loan, you can reduce your EMI and repayment amount with lower interest rates. You can also restructure your loan by opting for a different loan tenure.
Things to consider when you switch the loan
Whether switching your loan will reduce your repayment amount depends on various factors. Before you plan to switch and apply for a new loan, you must consider the following aspects –
- Remaining loan amount
Before making the switch, you must ascertain the remaining loan amount. How much amount do you owe to the lender? If it is a substantial amount, it could be a good idea to refinance. If it’s not, and you have a lesser amount to pay, you must not switch your loan. You need to pay various costs for refinancing. It will not be worth paying additional loan application charges if you do not owe a high amount.
- New loan eligibility
To get a new personal loan for refinance, you need to meet the eligibility criteria. You must qualify for a new loan at a lower interest rate. You must check your eligibility and credit score. If your financial profile has improved, it could be easier to avail a new loan at better interest rates.
You can opt for a personal loan refinance when you want to decrease your monthly payments, have a better credit score, or want to switch your interest rate type. However, you must know that it can affect your credit score, and you could need to pay additional costs, impacting your savings. Therefore, ensure that you opt for a personal loan balance transfer after ascertaining your savings compared to the costs involved.