We never know when an emergency would strike, which invariably puts a lot of pressure on our cash flows. To circumvent this, we opt for a Personal Loan from a financial institution at a high-interest rate as we are in urgent need of funds. However, we realize that the EMI’s are burning a hole through your pocket and we look for ways to lower the interest which reduces EMI’s.
There are primarily two ways to go about it:-
Let’s understand Personal Loan Refinance first.
How to Refinance a Personal Loan?
The first thing that comes to mind is How to refinance a Personal Loan and what does it mean? When one refinances a personal loan, one is using a new loan to settle the existing loan. There are generally varied reasons as to why one would refinance a Personal Loan, but mainly it’s due to a better interest rate.
There are other reasons as well which are explained below:
- Better Credit Score – If one’s credit score has taken a positive jump, from when the initial loan was taken, it is a good reason to refinance.
- Switch Rate Type – What this means that if we have a variable interest rate on our existing loan, the rates may go up or down every month, thus making it difficult to plan finances. By refinancing, one can switch from variable to fixed rate so that consistent payment every month is made.
- Balloon Payment – Generally towards the end of the repayment period, you are made to make a huge payment to settle your loan. To avoid this, one can refinance ahead of time to a better personal loan that doesn’t have such stipulations.
- Longer Repayment Terms – If there is some issue with our finances, one can look to refinance their existing personal loan for a longer repayment term, thus helping in reducing the monthly payment and leads to less stress with regards to payment of EMI’s.
Must Read: How to Clear Credit Card Debt with a Personal Loan?
The following steps are to be followed to refinance your personal loan
- Money Requirement – When we refinance a loan, basically we are paying off our existing loan with the new one with better terms. So it’s advisable to determine the exact amount of the loan required to pay off the current loan. Also, it’s advisable to check if there are any prepayment penalties on the existing loan.
- Credit Score – One then needs to check if they have a favourable Credit score to refinance their personal loan.
- Rates and terms at NBFC – The next step would be to shop for rates and terms of personal loans at various lenders and to choose the one that is most favourable in terms of lower personal loan interest rate and other terms. What’s the savings when it comes to interest? A cost-benefit analysis is recommended to be done to understand how much one will gain.
- Current Lender – It’s also advisable to get in touch with your current lender to see if they are willing to offer better terms on your existing loan. The reason behind this is simple, since one is already in contract with them, there is always a chance the lender wouldn’t want to lose business but instead offer better terms than what is being offered on the existing loan.
- Apply for Loan – Once all the above steps are completed one can fill up the forms and submit documents that are required from them and keep in mind about payment schedule and fees, including prepayment penalties. If the terms are acceptable, then one will receive the funds and it can be used to pay off the current loan.
Must Read: Best Ways To Get a Personal Loan at the Best Interest Rate
What is a Personal Loan Balance Transfer?
- A Personal Loan balance transfer, as the name suggests, is a process where a customer transfers the remaining balance on his existing personal loan from one lender to another.
- This normally happens when the new lender offers better interest rates thus leading to a reduction of debt.
- A personal loan balance transfer calculator can be used to ascertain what will be the cost incurred to transfer the balance of a personal loan to a new lender.
- One needs to carefully assess the Personal Loan balance transfer offer and choose the best one to save on the total interest payable. There may be few charges to be paid and it is to be understood clearly.
How to Choose Between Loan Refinance and a Loan Transfer - Making the Decision
Personal loan refinance is a better option at the early years of the loan as it’s during this time that the interest component is at its highest. Progressively, the interest reduces over the years. With Balance Transfer, you get the same benefit at a lower interest rate. One needs to do a detailed Cost-benefit analysis of both the methods to see what best suits them.