Personal loans can be an easy way for you to obtain funds for life’s emergencies. Whether home repairs, car troubles, or even medical emergencies, you may appreciate the convenience that personal loans offer when emergency funding is needed. If you end up taking a personal loan with a higher interest rate you will be relieved to find that refinancing that loan with a lower interest rate loan is an option. However, you may be asking yourself “does refinancing a personal loan hurt my credit?”
How Does Refinancing a Personal Loan Work?
Refinancing a personal loan is accomplished by paying an existing loan off with a new loan that ideally has a lower interest rate or longer payback term. You could refinance a personal loan as a way to make paying the existing loan’s principal balance easier. Here are several steps to refinancing a personal loan.
- Check Your Credit Score
If you are looking to refinance a personal loan you want to get the best possible rate when shopping for loans. Refinancing loans when you have bad credit could make it difficult to obtain a lower interest rate. A lower credit score may put you at risk of not being approved or receiving a higher interest rate on the new loan. A higher credit score may increase the likelihood of a lender offering a lower interest rate on the loan.
- Research and Compare Loan Options
Refinancing a personal loan first requires research. If you are looking to refinance a personal loan you must know what their lender options are and what terms those lenders offer. Finding the lender with the best possible terms may help make the personal loan refinancing process less stressful.
- Determine What Extra Fees You May Need to Pay
There are many charges linked to obtaining a personal loan. When applying for a loan, it is necessary for you to read the fine print. The cost of obtaining a new personal loan includes fees such as an origination fee, application fees, and processing fees.
- Apply for the Loan
Once you have researched the options and have decided which loan is best for you, you can then apply for the loan. In most cases, when applying for a loan, you may have the option of applying online, potentially making the loan approval process quicker. If you are applying for new loans you must consider that the loan application process involves the lender making an inquiry into your credit history. Once the lender checks your credit report, a hard inquiry is made, which may lower your credit score.
How Else Does Refinancing a Personal Loan Impact Credit?
Refinancing personal loans may also impact your credit by possibly lowering the average age of the borrower’s accounts. According to FICO, the length of your credit history comprises 15% of the criteria used for determining credit scores. You essentially pay one loan off with a newer loan when refinancing personal loans. The average age of your account decreases once the first loan’s principal balance is paid off, possibly lowering your credit score.
Refinancing a personal loan may also positively impact your credit score. According to FICO, your payment history comprises 35% of your credit score, while the amount owed on your accounts makes up 30% of credit scores. Consolidating the principal balance of a personal loan into a new loan with better payment terms may help you to manage your payments better. You must be sure to obtain a lower interest rate or longer payment timeframe in order to pay the principal balance off sooner.
Refinancing for the Long Term
While refinancing a personal loan may temporarily lower your credit score, it may ultimately help to improve it when used responsibly. Lower interest rates and longer payment timeframes may help you to increase your credit scores. By making consistent payments towards the principal balance of the loan, you can improve your payment history while decreasing the amount you owe.
Refinancing a personal loan offers long term benefits if you are looking to improve your credit history. You must be sure to do your research and understand when obtaining a personal loan for debt consolidation is right for you. When used responsibly, personal loans can be a great way for you to improve their financial well-being.