A personal loan refinance allows you to take a new loan to replace your current one that may have a different interest rate or repayment schedule. Loan refinancing should only be done if the new interest rates fall lower than your existing personal loan rate. It’s also advised to refinance your loan to extend your loan’s repayment term.
If you obtain a reduced interest rate when refinancing, your loan will have a lower cost of borrowing. As a result, it will lower the overall payment you need to make on your personal loan. Also, refinancing your loan to reflect an extended loan term will decrease your monthly payment obligation.
However, many individuals who refinance their personal loans are still prone to committing costly mistakes due to insufficient knowledge about the inner workings of loan refinancing.
To help out, we will discuss these common mistakes to help borrowers familiarize themselves and avoid them altogether.
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Refinancing Loan Without Preparing
Refinancing can benefit you, especially if you struggle to repay your existing loan, but doing it without proper preparation could have financial consequences. So, you may want to take a few initial steps before refinancing.
Following are the steps you must take in refinancing your personal loan to help you stay on the right track:
- Evaluate Your Credit Score
- Get hold of refinance rates and terms from various lenders.
- Start comparing all the rates and fees you acquired.
- Prepare all required documents
- Apply for the loan and await underwriting
Remember that the loan refinancing process varies from lender to lender. However, the preparation you should take before applying for refinancing stays the same.
Deciding to Refinance With the Same Lender Without Shopping Around
One mistake most borrowers tend to repeat is applying for a loan refinance from the same lender without checking out for other options. Remember that lenders spend money on marketing to attract their current customers to do just that.
You can lose money if you don’t research and accept the first offer you get. For instance, your current lender may offer you a 4.5% refinancing which is very enticing.
However, if the catch of getting such a rate is to extend your loan term, you might lose a lot of money. Meanwhile, checking with other lenders will let you know if you qualify for a much lower refinancing rate.
Some lenders will gladly offer you 4.2% as a special rate for new customers. However, you should shop around first and acquire all the offers from various lenders to see what is in store for you before you apply for a loan refinancing.
You have many options nowadays, and one is always better than the others. All you need to do is to conduct your research and choose the best deal offered to you. Lastly, find a lender you can trust, like CreditNinja.
Hesitating to Lock In Low-Interest Rates
Many borrowers miss the opportunity to lock in the current interest rate because they tend to think that the rate will drop further. Little do they know that it’s a huge mistake.
When acquiring a loan refinancing, you should make sure you are locking the current rate, especially if you are getting a fair rate.
Locking in your rate means that the interest rate of your loan will stay the same throughout the loan term.
Remember that a change in rate doesn’t always mean it’s favorable. Sometimes, it changes for the worse.
Concentrating Solely on Interest Rates
Borrowers frequently fail to consider lender fees, loan terms, and their reputation when applying for a loan. They often focus more on the interest rate offered by the lending company.
However, it’s best to compare several offers and run all the figures, including all fees, using a loan calculator to see which deal is the best or if refinancing is the right decision for you.
Don’t forget to research the lender’s background to know how reputable they are. Instead, you should look at the entire picture and avoid focusing only on one factor.
Brushing off Discount Offers
Borrowers frequently mistake forgetting about additional discounts when refinancing their loans. Some lenders, for example, offer a 0.25 percent interest rate reduction once you enroll for autopay.
An autopay is an option for borrowers to have their monthly payments automatically withdrawn from their enrolled bank account. Although a 0.25% discount doesn’t seem like much, any decrease in interest could allow you to put more toward your loan’s principal balance. As a result, it will save you money down the road.
On a Final Note
Refinancing a personal loan can benefit you as a borrower if you do it the right way. When you think refinancing your loan will help you pay it and organize your finances, it would be best to go for it. But make sure to learn from other borrowers and avoid the mistakes they often make.
Read also: How Small Loans Affect Your Credit Score