“When and How to Refinance Your Personal Loan”

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When Should You Consider Refinancing a Personal Loan?

One of the primary reasons borrowers opt for personal loans is to consolidate high-interest debt into a loan with a lower interest rate. Similarly, refinancing your current loan can be beneficial if you find a loan with a more favorable interest rate.

Refinancing a personal loan involves prequalifying for a new loan, submitting an application, and using the new funds to pay off your existing loan. Understanding the pros and cons of personal loan refinancing and its impact on your credit can help you make an informed decision.

Steps to Refinance a Personal Loan

Refinancing a personal loan can be done through traditional banks, credit unions, or online lenders. Here are six steps to guide you through the process:

1. Determine How Much Money You Need

Ensure your new loan has a borrowing limit high enough to pay off your current loan. Account for any prepayment penalties and origination fees to ensure refinancing is beneficial.

2. Review Your Credit Report and Credit Score

Check your credit report and score before shopping for a new loan. Lenders typically offer the best rates to borrowers with excellent credit.

3. Shop and Compare Rates and Terms

Prequalify with multiple lenders to compare personal loan rates and terms without affecting your credit score. Ensure your comparisons are for the same loan amount and repayment term, and consider any applicable fees.

4. Submit Your Application

Once you find the best loan offer, fill out an application and provide any required documents, such as identification, Social Security number, pay stubs, and account statements. If approved, you should receive the funds within one to five days.

5. Pay Off Your Existing Loan

Your lender may transfer the funds to your account or pay off your original loan on your behalf. Confirm that your first loan is closed and no balance or additional fees remain.

6. Make Payments on Your New Loan

Once you receive the funds, your repayment period begins. Setting up automatic payments can help ensure you never miss a payment.

How Refinancing a Personal Loan Affects Your Credit

Refinancing your personal loan can impact your credit score in a few ways:

Hard Inquiries

When you apply for a new loan, the lender performs a hard check of your credit report, which can temporarily lower your score. However, if you shop for a single type of loan within a specific time frame, the credit scoring companies may count your applications as a single inquiry.

Length of Credit History

Refinancing can affect the length of your credit history, which makes up 15% of your FICO® Score. If your personal loan is one of your oldest accounts, refinancing it may decrease the average age of your accounts, potentially lowering your score. Consistent on-time payments on your new loan can help you recover your original credit position.

Should You Consider Refinancing Your Personal Loan?

Refinancing a personal loan may be worthwhile if the new loan improves your financial situation. Compare your current loan with any new offers to see if refinancing can reduce your interest charges, make payments more affordable, or shorten your loan term.

If the new loan offers higher interest rates, consider improving your credit score before refinancing. Economic factors can also influence interest rates, so timing is crucial. Tools like Experian Boost® can help raise your FICO® Score by giving you credit for paying bills like phone, utilities, and streaming services.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you find the best loan options tailored to your financial goals.

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