Are you upgrading the appliances in your home? Is it finally time to renovate the basement? Will a minivan be a better fit for your family than the 2-door coupe you currently have?
Whatever your reason may be, a personal loan is a great way to help cover the costs of products and events you can’t outright pay for right at this moment. But if you find a better deal on your loan in the future or need some financial changes to support your quality of life, is it possible to refinance your personal loan for something a little more manageable?
The answer is simple: yes!
However, there’s more to personal loan refinancing than simply applying. Today, we’ll look at how refinancing a personal loan can help curb your monthly expenses and how it may or may not affect your credit score. Here are some things you need to be aware of before starting the refinancing process.
At Blue Copper Capital, we pride ourselves on providing ethical borrowing options so you can live the life you deserve without the stress of debt clouding your otherwise healthy financial history. Find out how our team can support you and speak to one of our experts today!
What Are Personal Loans?
Personal loans, also known as installment loans or consumer loans, are simple to understand: you borrow money from a lender and agree to pay it back, plus interest, over a fixed term.
Loans may range from as little as $1000 to $100,000 and can be used for any expense—whether it’s repairing a car, paying for a wedding, or renovating your home. You may borrow a personal loan from various lenders, like banks, credit unions, payday lenders, pawnshops, or private lenders, but where you choose to borrow can significantly affect your loan term and interest rates.
How Do You Apply for One?
In Canada, anyone over the age of 18 can apply for a personal loan, provided you also have:
- A regular source of income
- A permanent address
- A bank account
The application process may be different depending on the lender, but most will also check your credit report, credit score, and debt history before they decide to approve your application. You do not need good credit history to get approval for a personal loan, but it’s essential to understand your ability to pay back debt.
If you have a long history of missing payments or debt problems, applying for a personal loan may not be the best financial decision. However, small loans could help you build credit over time, improving your ability to get larger loans (like a mortgage) in the future.
Are There Different Types of Personal Loans?
There are two different types of personal loans you should be aware of:
Secured Personal Loans
Secured personal loans are tied to a specific asset that acts as collateral if you can’t pay the loan back.
Assets you may use to secure the loan can include your car, home, or other valuable items, and it can help you borrow larger amounts of money. Because the lender has something that guarantees their investment, they might be more comfortable with a larger loan.
Unsecured Personal Loans
Unsecured personal loans aren’t tied to an asset, and your lender may only agree to let you borrow smaller amounts of money compared to a secured loan. Unsecured loans may also come with higher interest rates and shorter payment terms.
Why Would You Refinance a Personal Loan?
Now that we understand personal loans, let’s look at why you would want to refinance the one you have.
Whether you want to refinance a loan or not is entirely up to you. Still, refinancing can offer several advantages, especially if you’re starting to experience some difficulties keeping up with your current monthly obligations. Let’s discuss some pros and cons of refinancing loans.
Pros of Refinancing Loans
Lowering Your Monthly Payment
In some cases, you may need to adjust your expenses if your financial situation changes.
While refinancing your loan can decrease your monthly payments, it may be at the risk of extending your payment period. The longer your payment period is, the more you will also likely need to pay in interest over time.
Lowering Your Interest Rate
You might want to consider refinancing your personal loan to help lower your current interest rate.
Interest is applied to all loans, but the loan rates depend on several factors, like:
- How much you borrow
- Your credit history
- The type of loan you have (secured or unsecured)
If you find a better interest rate from a different lender, or if your lender is willing to refinance your loan under a new interest rate, you could decrease a portion of your monthly payments.
Shortening Your Payment Period
If your financial situation changes or improves while you’re paying back your personal loan, you may consider refinancing to help shorten your payment period to pay back the loan faster.
Shortening your payment period may increase your monthly payments, but you can decrease the overall interest you’ll pay over time.
Potential Cons of Refinancing
While refinancing your loan can come with several benefits, you should consider a few different risks before making a final decision.
Refinancing a Loan Is a Balancing Act
You have to play a little bit of a balancing act when it comes to refinancing your loan, whether you’re shortening your payment period, lowering your interest rates, or decreasing your monthly payments.
For example, if you’re lowering your interest rates, you may need to extend your payment period. Or, if you’re shortening your payment period, you may need to increase your monthly payments.
Whatever your reason for refinancing your loan may be, please be aware that it may come with additional responsibilities.
Know Your Fees
All loans have several fees you need to be aware of if you decide to refinance.
Some of these costs may include penalties for paying off your original loan early or fees for opening or closing a loan. These fees can add up if you’re not careful, sometimes costing you hundreds or even thousands of dollars.
How to Refinance Your Personal Loan
Whether you’re interested in paying off your loan early or reducing how much you need to pay every month, you’ll still need to complete the application process before refinancing your loan.
However, refinancing your loan is a significant decision, so it’s crucial to go through these steps to ensure refinancing is the right choice for you and your financial wellbeing.
Look for Options
Even if you already know how refinancing your loan may support you, it’s still important to look for other options.
Other lenders may offer better interest rates or payment periods depending on what you’re looking for, and you may be able to use this information when you and your lender finally get together at the negotiating table.
Apply for The New Personal Loan
Once you and your lender agree on a loan, it’s time to apply.
Your lender will provide an application form which you’ll fill out with all the information they need. As part of the application process, they may also check your credit history, confirm your credit score, and analyze at your debt history.
Pay Off Your Old Loan & Verify
Once approved, you can pay off your old loan and start paying into your new loan agreement. Make sure you also contact the lender of your old loan to confirm it is paid up.
Congratulations! You’ve successfully refinanced your personal loan.
Find Loan Options Right for You
Refinancing your personal loan can provide a wealth of opportunities for improving your financial situation.
Whether you’re looking to cut some monthly expenses or want to get out from under debt more quickly, knowing the process and how you can use it to your advantage is the difference between struggling to pay off your debt and achieving financial freedom.If you’re wondering how refinancing your loan can help you take control of your money, speak to our experts today at Blue Copper Capital. We’ll be happy to help you find loan options right for you, your family, and your future.
