How To Refinance A Personal Loan: Everything You Need To Know! (January 2023)

Refinance Your Personal Loan Today

Refinance Your Personal Loan Today

During inflation, emergencies, or crises, interest rates tend to increase, but life continues. There are times when you urgently feel the need for a financial cushion to fall on for your personal needs. And during those times, the natural urge is to opt for a personal loan from a financial institution, even with surging interest rates. However, when it comes to repayment, you may realise that it is becoming difficult due to the high-interest rates. You may wonder if there is a chance to lower the interest burden to reduce your EMIs.

In that case, look for better interest rates that fit your current budget or search for ways to lengthen your time to pay off your debt. It is obvious for you to  wonder, “can a personal loan be refinanced?” Well, the answer is yes. Refinancing your loan can be beneficial and easy on your budget.

Let us understand in detail what refinancing a personal loan is and how you can do that.

What is Refinancing?

Refinancing is a process where a borrower revises or replaces the terms of an existing loan agreement by getting a new loan to pay for the existing one. Usually, this is done to make changes in their interest rate, EMI tenure, payment schedule, or other terms that were in the previous agreement.

Can You Refinance a Personal Loan?

Well, personal loan refinancing is possible, but a borrower will need to be eligible for the lender to approve the refinancing. Borrowers with excellent credit scores and repayment history are usually preferred by lenders for refinancing approval. Monthly income and fixed obligation to income ratio (FOIR) are also necessary requirements in the assessment process. If the applicants fulfill the necessary requirements, they will be approved.

What Does It Mean To Refinance a Personal Loan?

Refinancing a personal loan means a process of taking out a new loan and using that money to pay off one or more existing or outstanding loans. Refinancing is a great option for an individual who wishes to get lower interest rates or reduce their repayment amount. Extending the loan term can also be highly beneficial for people to reduce their monthly repayment. In short, personal loan refinancing helps people save money with lower interest rates, better loan agreement terms, lower fees, and more time to pay off their debt.

Borrowers also refinance their loans so that they can pay them off more quickly. This can be done by shortening the loan tenure so that they can save up on the interest in the long run. The primary reason borrowers refinance is to get a more affordable loan as per their budget, to tweak their repayment capabilities or their existing loan structure to suit their needs. When an individual chooses to refinance their personal loan, the new bank or lender will take over the loan from the existing lender, and therefore, the borrower will be required to pay all the future EMIs to the new lender.

When Should one Opt for Personal Loan Refinancing?

Refinancing is usually done when the borrower is in a better economic position to clear their debt. This can be due to many reasons. Refinancing can also be considered an option when the economy is doing better, as this results in better interest rates.

  • When A Lender Offers Attractive Interest Rates

When the existing loan structure has a high-interest rate, refinancing your personal loan should be considered a good option, especially if a lender is offering a lower interest rate. Interest rates are cyclical, so It is good to take advantage of a better offer to refinance personal loan rates when the interest rates fall, as it would mean paying lower EMIs every month.

  • When a Borrower Has a Better Credit Score

Lenders periodically offer better and more attractive deals on processing fees and interest rates. These offers are usually available to borrowers when their credit score starts looking good. When an applicant’s CIBIL score has improved since their last loan application, there may be great deals on instant personal loans that they can get. These offers should be grabbed by refinancing an existing personal loan based on the improved credit score.

  • To Avoid a Balloon Payment

What is Balloon Loans

A balloon payment is a lump sum principal balance payment attached to any loan or mortgage. This payment is usually made at the end of a loan period, and it is usually higher than the amount that is paid every month. Some personal loans that require interest-only payments throughout the loan tenure are accompanied by a balloon payment. To avoid this payment, you can choose a refinance option that does not come with these stipulations.

  • When a Borrower’s Income Has Increased

If there has been a considerable rise in a borrower’s income level, they might want to clear off their loans faster. When the borrower can afford large monthly payments, they can reduce the term of a loan by refinancing it and choose one with a shorter loan tenure. This will save their overall interest.

  • When a Borrower’s Income Has Been Reduced

If there comes a situation where a borrower no longer has a job or is facing a pay cut, they might want to consider extending their loan term. Extending a loan term will lower the monthly repayment towards the loan. In such cases, you can refinance your current loan for a longer repayment loan term.

  • When a Borrower Wants To Switch Their Variable Rate

Some borrowers have a variable Annual Percentage Rate (APR) on their personal loans. This may be difficult for them to make their monthly repayments regularly. The uncertainty in the monthly repayment amounts may make them shell out more money in certain months and less in others. In order to fix this problem, they can opt for refinancing their existing personal loan. After refinancing, they can change the variable rate to a fixed one. Paying a fixed sum as repayment every month and throughout the loan, tenure will be a better plan for most borrowers than the amount being unpredictable.

  • To Change Or Delete a Co-Applicant From The Loan

Co-applicants are great when applying for a loan, and this is because there is an increased chance for loan approval when there is a co-applicant. They are an integral part of the loan application process. So, when a borrower wants to add or delete a borrower from the existing loan, they can opt for refinancing. Refinance will provide a borrower with a new set of terms and conditions in the loan agreement, giving them the ability to delete or add a co-applicant to their loan account.

Also Read: How to Get a Personal Loan? – A Complete Guide

Can You Refinance a Personal Loan With The Same Bank?

The best personal loan refinance can be done with the same bank. Enquire with the existing loan lender before applying for refinancing. When a personal loan is refinanced from the same bank, it makes the approval much easier. This is because there is already a relationship that has been formed between the lender and the borrower. All the borrower’s documents and history will already be easily accessible by the lender. Your payment history and credit will also be available to the banker hence making the process a bit easier.

refinance a personal loan with the same bank

Steps To Refinance Your Personal Loan

  • Understand The Terms

Understand and compare the rates and terms of the new loan among different lenders and compare their times with the existing loan as well. Make sure to know the details of prepayment penalties, if any, with the current loan. It would be of great help to understand the terms of the Lower interest rates and flexible options that were well studied and analysed. Preparing a cost-benefit analysis is also important. It is critical to look at the fine print as there could be hidden charges and application costs. Also, understand if the existing lender can refinance the loan by offering flexible terms.

  • Check Your Credit Score

Checking your credit score is crucial while going for a loan to refinance your existing personal loan. A higher score will give you a better interest rate from the lender. The ideal score could vary between lenders, but anything above 650 is most likely ideal for refinancing options. The higher this score, the better it is to avail of a loan with a low-interest rate. Make sure to keep working on improving this score as a borrower.

Also Read: 7 Myths About Credit Score Report That Need To Be Cleared

  • Determine The Exact Loan Amount

An important step is to determine the exact amount required to refinance the existing loan that fits your budget, interest rate, loan term, and more. Remember that a borrower is paying off an existing loan with a new one based on terms that are easier on the borrower’s budget, so it is crucial to determine the right amount once a comparison of the rates and terms of the lenders has been made.

  • Apply For The Loan

It is important to select the right lender based on the borrower’s requirements. Once the lender has been selected, the next step is to fill out the required forms and furnish all the documents sought by the bank. All documents relating to the borrower’s income, tax returns, and the existing loan will have to be furnished. Once this procedure is complete, the funds will be approved in a few days, and then they will be credited.

  • Settle The Original Loan

Once the new loan amount has been credited, make sure to pay off the existing loan. Close the account as soon as the payment is made without any delays and penalties. Get a written confirmation that this loan is closed.

  • Start Paying off The New Loan.

Once the original loan has been closed, start focusing on the new loan repayment. Make sure that this loan is repaid based on the new terms that have been set, which include loan terms, interest rate, etc. Do not default on this payment as it will badly impact your credit score, and besides, regular repayment of the new loan will improve your credit score and history.

Top Private Lenders Offering Personal Loan Refinance

Name of the Bank Interest Rate Benefits offered
HDFC Bank 10.50% onwards
  • Competitive interest rate.
  • Low processing fee of Rs.1,999.
  • Top-up facility available.
Induslnd Bank 10.49% onwards
  • Hassle-free transfer.
  • Low processing fees.
  • Less paperwork.
ICICI Bank 10.75% onwards
  • No security or guarantor required.
  • Minimal documentation.
  • Facility to top-up loan.
  • Increased tenure.
Kotak Mahindra Bank 10.50% onwards
  • Quick processing and disbursal.
  • Additional top-up loan available for up to 100% of the personal loan amount.
  • Flexible repayment options.

Types of Refinancing

Rate-and-term refinances

  • Rate-and-term refinances: The goal of this refinancing is to save money in the long run. Rate and term refinancing is the most common type of refinancing, where you get a lower monthly payment or less overall interest. It is due to a lower interest rate or a shorter loan term that is fixed as the new set of terms for the new loan.
  • Cash-out refinances: In cash-out refinancing, an asset such as a house serves as collateral. As the value of this collateral increases, the asset’s equity will be withdrawn and exchanged with a higher loan amount. Instead of selling the asset, you gain a higher value by taking out a loan.
  • Cash-in refinances: This is the opposite of cash-out refinance. Under cash-in refinance, the borrower gets cash to clear the loan by paying down the loan balance, thereby lowering the amount owed to the lending institution.
  • Consolidation refinancing: this is a type of refinancing where the borrower applies for a new loan at a lower interest rate to pay off their existing loan amount. They will then be left with an outstanding principal amount with a very low-interest rate payment.

Pros and Cons of Refinancing a Personal Loan

Pros

  • Lower Interest Rate

A refinance personal loan rate is the biggest benefit of refinancing as the borrower will get lower interest rates. When the existing lender has a high-interest rate, refinancing is an excellent option to lower the overall interest, and this will also bring down the EMIs to a great extent.

Also, Check: Latest Personal Interest Rates of Banks and NBFCs

  • You Can Adjust The Loan Term.

The tenure of the loan term can be adjusted based on your income and repayment capacity at the time. If the repayment is burdening your finances, you can go for a longer tenure when you refinance your loan, and if your income has increased, you can use the refinanced loan to decrease the loan term and close it quickly.

  • Switch From Variable To Fixed Rates

When you refinance your existing loan, it is possible to change the repayment structure from a variable rate to a fixed rate and give a fixed sum every month instead of the variable amount that you were paying according to the original loan.

  • Lower APR

You may be able to get a lower Annual Percentage Rate (APR) on the refinanced loan if your credit score or income has improved.

Cons

You may wonder, “ what does it mean to refinance a personal loan?” well, as there are pros to refinancing a personal loan, there are also cons to it. These are:

  • You may have to incur a prepayment penalty on your existing loan.
  • Refinancing of loans may affect your credit score if lenders go for a hard credit inquiry.
  • Taking out a refinance loan may incur origination or application fees from the new lender. All the initial costs will have to be factored in before refinancing your existing personal loan.
  • If the loan term is reset to its original length, the total interest payment may be more than what you save from a lower interest rate.
  • You may reduce the equity you hold on your home if you have given it as collateral in a cash-out refinance.

Things To Remember

  • Understand prepayment and foreclosure charges that are applicable for different banks when clearing your existing loan.
  • Do thorough homework on the interest rates, fees, terms, and repayment structure before zeroing in on the lender for refinancing. Make sure you get the best deal possible.
  • When going for refinancing options, make sure to check whether the lender is demanding an application or origination fee. Read customer reviews of the lender to get insights into their credibility.
  • Have all the necessary documents, such as income proof, bank statements, tax returns, etc., ready when approaching a lender.
  • Keep a good credit score. You can get a reasonable interest rate if your credit score is high, which will help you in the long run when repaying your new loan.
  • Do a cost-benefit analysis to check how much you stand to gain if you refinance your loan. Make sure it helps you save your money in the long run.
  • Do not get into a continuous cycle of debt. If you are constantly taking loans to pay off existing loans, you are extending your debt timeline, which may prove detrimental.

Conclusion

Refinancing a personal loan is a good option if it puts you in a better financial position by lowering your monthly repayments or EMIs or shortening the term of the loan without additional charges. The most crucial step is to understand the existing loan agreement and the terms of the new loan agreement. While a variety of options are available and a host of services tailored to your needs, a comprehensive review and research of the terms, interest rates, monthly repayment, tenure, and details of initial costs and an understanding of the risks will help you determine the best refinance option that fits your financial goals.