It might sound simple to refinance a personal loanâ swapping one loan for another, but it can offer an opportunity to reshape a borrowerâs finances. By taking out a new loan to replace an existing one, borrowers can potentially lower their interest rate, reduce monthly payments, or choose a lender that better fits their needs. Â
Whether a borrower is looking to save money, streamline payments, or gain a bit of financial breathing room, refinancing could be the key to reaching their goals faster. Hereâs how it works:Â
Decide how much to borrowÂ
A borrower who wants to refinance their personal loan should make sure their new loan has a high enough borrowing limit to cover the balance on their current loan. They should also check whether their existing lender charges a prepayment penalty, which is a fee for paying off a loan early. If they do, they should do the math and make sure refinancing makes financial sense.Â
Understand their credit Â
Before a borrower looks for refinancing offers, itâs wise to determine their creditworthiness. They can get a free credit report from AnnualCreditReport.com or use a free credit score monitoring service to review their credit history. Â
If borrowers notice any errors on their credit report, they should dispute them with the appropriate credit reporting bureau to ensure their credit is in good standing before applying for a new loan. Â
Prequalify for loan offersÂ
Not all lenders are created equal. For this reason, itâs well worth it for a borrower to shop around and compare refinancing options from different lenders. Many lenders offer prequalification tools on their websites so prospective borrowers can check potential rates and terms without impacting their credit score. Itâs also important to note that refinancing usually involves working with a lender that is different from the one that issued the original loan. Borrowers should compare factors like:Â
- Interest rates Â
- Repayment terms Â
- Fees Â
- Special perksÂ
- Lender reputation Â
Submit an applicationÂ
After completing the prequalification process and the individual finds what they think might be the right lender, they can complete a refinancing application online or in person. The applicant needs to submit basic personal information and documentation, such as a government-issued identification document (ID), pay stubs, and bank statements. If the applicant is approved, they will likely receive their funds that same day or within a few business days.Â
Repay the old loan and begin payments on the new loanÂ
Some lenders send the loan proceeds directly to the new borrower so they can pay off their current personal loan. Other lenders will pay off the old loan or loans on the borrowerâs behalf.  Â
As soon as the new lender has begun the payoff process, itâs time for the new borrower to begin repaying their new loan through monthly payments. Making on-time payments each month is important. If the borrower falls behind on payments, they could face late fees, damage their credit score, and even default on the loan.Â
Maximize the potential of refinancing Â
While refinancing a personal loan might take some time and effort at the start of the process, this method of getting better loan terms has the potential to benefit the borrower. The key, however, is to find the right refinancing offer and ensure it provides substantial savings.Â
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About OneMain FinancialÂ
OneMain Financial is the leader in offering nonprime customers responsible access to credit and is dedicated to improving the financial well-being of hardworking Americans.Â
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