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If you have an existing personal loan, you might be surprised to find that you’re not necessarily stuck with the current loan terms you’ve agreed to. You may be able to refinance your personal loan just like you can refinance a mortgage.
Refinancing takes some effort, as you will need to apply for a new personal loan which you will use to pay off the old one. But it can be worth it in some circumstances. To help you decide if refinancing your personal loan makes sense, ask yourself these key questions.
1. How much do you still owe on your personal loan?
Refinancing your personal loan can take time as you will need to submit an application, provide financial details and wait for approval. It also takes some effort, as you will need to secure funding for your new loan and then use it to pay off existing debt.
If you don’t owe a lot of money on your current loan, refinancing may not be worth it. Instead, you can focus on paying more on your loan and paying it off as soon as possible.
2. What is your current interest rate?
Interest is the cost you pay to borrow. It hardly ever makes sense to increase the interest rate you pay on your debt unless you can’t pay your monthly payments with your current loan, or unless you have a variable rate loan and are worried about rates going up during your repayment period.
To decide if you should refinance in 2022, you need to know what your current rate is and if it might change. Collecting these two pieces of information can help you make an informed choice about whether to refinance. You can find them by looking at your original loan documents or by asking your lender.
3. Can you get a loan at a lower rate?
Once you know the interest rate on your current debt, you’ll need to compare it to the rate you might qualify for on a refinance loan. If you have better financial information than when you first borrowed, or if you originally took out your loan when rates were higher, you may be able to get a new loan at a lower rate.
If you can lower the interest rate on your current loans with your new refinance loan, that’s a strong point in favor of refinancing. By lowering the rate you pay, less of your hard-earned money will go towards interest. Each payment will result in more money towards the principal, which will reduce your loan balance more quickly.
4. How much time do you have left to repay your loan?
Finally, you need to consider the repayment time remaining on your current loan and compare it to the repayment periods of any refinance loan you are considering.
If you don’t have much time left to pay off your current loan, refinancing could end up meaning that you extend your repayment time. A longer repayment period means you will pay interest for longer. This can result in higher total costs, even if you get a lower interest rate on the refinanced loan.
By considering these four questions, you can decide if refinancing your personal loan will pay off by saving you money or if it will backfire. You’ll want to make the right choice, so be sure to research your options thoroughly before refinancing in 2022.
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