What does ‘refinancing’ a personal loan mean?

Refinancing a loan means replacing your existing debt obligation with more favourable and updated terms. It means taking out another loan to pay off your current one. 

When Should You Refinance a Personal Loan?

You should consider refinancing a personal loan under the following circumstances:

1. Lower Interest Rate: If you can qualify for a new loan with a significantly lower interest rate than your current one, refinancing can save you money on interest payments.
2. Improved Credit Score: If your credit score has improved since you originally took out the loan, you may qualify for better loan terms, including a lower interest rate.
3. Change in Financial Situation: If your income has increased or your financial situation has improved, you might be able to qualify for a more favorable loan with better terms.
4. Consolidation: If you have multiple high-interest loans, consolidating them into one loan with a lower interest rate can simplify your finances and reduce your overall interest costs.
5. Change in Loan Terms: Refinancing can also be beneficial if you want to change the loan terms, such as extending the repayment period to lower your monthly payments or shortening it to pay off the loan faster.
6. Escape High Fees: If your current loan has high fees or unfavorable terms, refinancing can help you escape those conditions.

It's essential to carefully evaluate the costs and benefits of refinancing and compare offers from multiple lenders to ensure it makes financial sense for your specific situation.

Ways in Which You can Refinance a Personal Loan

• If the interest rate of the new loan is lower than your current one.
• You have improved your credit score and are eligible for a better interest rate.
• Switching from a variable Annual Percentage Rate (APR) to a fixed one.
• Lowering your monthly payments and opting for a longer repayment tenure (if you are facing financial difficulties)
• Changing your repayment tenure to a shorter term because you can afford higher monthly payments.

In short, refinancing a personal loan is almost always a good idea if you benefit from the new conditions in one way or another. It does not have to be a monetary advantage, i.e. a lower payment on interest rates. It can also be as simple as relieving some of the financial pressure you may be under.

How to Refinance a Personal Loan?

When you refinance a personal loan, you are simply paying off your current loan with a new one, though with different terms. Here’s how you can go about it.

1. First, determine how much you need to cover your existing payments. 
2. Once that's done, do a credit score check. The best interest rates are only available to those with good credit scores (You can check your Experian Credit Score for free on the Fi Money app). That said, there is no point in refinancing a personal loan if the new interest rate is not significantly lower.
3. The next step is choosing the lender for refinancing the loan. People tend to believe that you should shop around for better rates. However, in almost all cases, your original lender will be more than willing to re-discuss terms. 
4. So, for instance, if you apply for a personal loan from Federal Bank, you can be eligible for loan refinancing if you meet their parameters. One simple tip here is to consider and compare their different refinancing offers to pick the best.
5. With all that done, you’re now ready to apply for a new loan from your chosen lender. The process may vary slightly depending on the lender. Nonetheless, you will have to submit a few necessary documents, which include your tax information, bank statements and monthly income proofs.

Smarter Payments, Better Terms

Get instant loans directly to your Savings Account through the Fi Money app. These are pre-approved personal loans made available to select users with good credit scores. On Fi, this process is 100% paperless, and the loans are provided at competitive interest rates — where each user remains in control with complete visibility of all details. Plus, you can avoid EMI late fees by setting up automatic in-app payments. Our partner bank, Federal Bank, assigns an eligible loan amount to each user (up to ₹5 lakh). The best bit? You can set up automatic in-app payments to avoid late charges.

Frequently Asked Questions

1. What are the pros and cons of refinancing a personal loan?

Refinancing a personal loan could result in significantly better interest rates, shorter repayment tenures and lower monthly instalments. However, refinancing can also come with extra fees, depending on the lender, and a higher total interest on the principal amount.

2. Will refinancing hurt my credit?

If you do refinance a loan, personal or otherwise, it will affect your credit score slightly. Nonetheless, this drop will only be temporary and rebound if you keep up with your payment instalments.

3. What is an example of refinancing?

When a borrower takes out a new loan with better terms and uses it to pay off an existing loan, such as a mortgage or a car loan, it can be be a case of refinancing. This can help the borrower lower their monthly payments, reduce the overall cost of the loan, or access cash for other purposes. The new loan may come from the same lender or a different one.

4. What is refinancing used for?

Here is how refinancing a loan can come to action for you -

• If the interest rate of the new loan is lower than your current one.
• You have improved your credit score and are eligible for a better interest rate.
• Switching from a variable Annual Percentage Rate (APR) to a fixed one.
• Lowering your monthly payments and opting for a longer repayment tenure (if you are facing financial difficulties)
• Changing your repayment tenure to a shorter term because you can afford higher monthly payments.