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Loan refinance is a great way to pay off existing debt at a lower and more favourable interest rate. Now, did you know that you can refinance a personal loan ? When we think of refinancing, we often think of heavier debt, such as a home loan or an education loan. However, personal loans too can be refinanced if you are looking for better terms of repayment. Read on to understand a bit more about how to refinance a personal loan.

Refinance meaning in banking

Let’s begin by understanding what refinancing really is in lending. Refinancing is the process of taking a newer loan to pay off existing debt. Refinancing is usually done to benefit from lower interest rates than what is currently being paid.

For example: If you have a personal loan at an interest rate of 13% pa and you see a new lender offering the same type of loan at a rate of 11% pa, you might want to consider opting for personal loan refinance. Even the 2% reduction in the interest rate can see you save a lot of money when you repay your debt.

When should I refinance a personal loan?

Now, it is important to note that refinancing is a decision that must be calculated and carefully planned. It might not be the perfect option for everyone. Firstly, you should consider refinancing only if you will make a substantial saving in your loan repayment. Next, you may want to choose to refinance if your credit score has improved significantly. In this case, you might get a much lower new rate on your loan based on your new score. People also choose to refinance their personal loans if they are looking for longer tenures. A new loan comes with new terms, and this includes a new tenure as well. If your current monthly payments feel too heavy, refinancing might be the solution you are looking for. You can smartly choose to lengthen the tenure to benefit from smaller, more manageable monthly EMIs.

Finally, you must also factor in prepayment costs (if any). Some lenders charge you a penalty if you repay your personal loan before its original tenure. If these prepayment penalties and the application fees for your refinance loan add up to a higher amount than what you aim to save through refinancing, you may want to reconsider your decision.

Steps to refinance a personal loan

When you have figured out what you need to know about the basic details, such as the refinancing interest rate and terms of the new loan, you can go ahead and apply to the lender. Here is a quick look at the steps you may generally need to follow:

Step 1 – Calculate your requirement

You must begin your loan refinance process by calculating how much you need to borrow. This way, you can avoid taking more than what is required. After all, no matter how low the new interest rate is, the more you borrow, the more you have to repay. So, it is wise to be prudent and make a careful calculation.

Step 2 – Discuss with your current lender

Before you go ahead and make a deal with a new bank, you may want to consider talking to your present lender to see if they are willing to negotiate the terms of your loan and offer you a better deal than what you currently have. If you have been a loyal customer with a good record of payments for many years, they may actually retain you. You can even talk to them about the possibility of waiving a prepayment penalty if you choose to move to a new lender.

Step 3 – Choose a new lender wisely

If you are not satisfied with the deal offered by your existing bank or financer, you can go ahead and begin the search for a new one. Make sure to compare interest rates, loan tenures, and other benefits offered. You can run a search online to compare the various lenders in your city before picking a few options. Once you have selected a few options, do visit their offices, or call up their customer care numbers to see what kind of help you get. You can also read a few online reviews of the kind of experience other customers have had with the lender.

Step 4 - Check your credit score

Before you apply to refinance your loan, you need to be sure that your credit score is good. A good credit score will see your application sail through smoothly without any hassles.

Step 5 – Apply for your refinance loan

Once everything is in order, go ahead and apply for your new loan. These days, many lenders allow you to apply for personal loans online. If you need a bit of help filling the form and sorting out the paperwork, you can head over to the bank’s office and fill up your application there.

Are there any drawbacks to refinancing a personal loan?

Refinancing a personal loan is usually quite beneficial for you as the borrower. After all, it helps you escape from a higher interest rate on a loan that you took years ago for lack of better options. Refinancing lets you set new terms as per your current finances too. However, there is a slight flip side that you need to be aware of. Firstly, remember that refinancing a loan affects your credit score just like any other loan application would. Your credit score can dip slightly when you refinance your personal loan; however, don’t let this dishearten you. With regular payments, your credit score can once again bounce back.

It is also important to remember that you may have to pay extra in terms of fees and charges when you refinance a personal loan. You may have to pay a prepayment penalty to your existing lender and pay loan processing charges to the new lender who is taking over your personal loan. These charges could add up to quite an amount, so you need to do your calculations very carefully.

It is important to weigh the pros and cons before you decide to refinance your personal loan. Remember to always evaluate your own unique circumstances and finances; what works for someone else may not work for you.

Get a personal loan from Bank of Baroda

Bank of Baroda offers personal loan finance at affordable interest rates with easy documentation and a hassle-free application process. We offer a range of loans including special COVID 19 personal loans to help people tide over the tough times of the pandemic. Salaried persons and self-employed professionals can apply for these personal loans with ease at a Bank of Baroda Branch or even online. With principal amounts as high as Rs 10 lakhs and a tenure that goes up to 60 months, you get true flexibility with your finances. Call us today on our toll free numbers 1800 5700.