How Do You Know When It's Time to Refinance Personal Loans?


Refinancing a personal loan -- or, really, any loan -- can be an excellent financial choice depending on your situation.

Knowing when it’s a good time to refinance is important, as it can ultimately lead to saving a lot of money down the line.

The basic concept of refinancing is simple: you use a new loan to pay down your existing loan, but your new loan should (theoretically) have more favorable terms.

But it’s important to also know some of the risks involved with doing so. When you’re dealing with large sums of money, fewer payments aren’t always better, and sometimes a lower interest rate isn’t enough to make refinancing the right choice.

Here are a few good indicators that refinancing might be an option for you, and a few caveats to keep an eye out for.

1) When Your Monthly Payments Are Too High

Monthly payments that are unrealistically high can be a major roadblock to paying off your debts. This is not always easy to control, and lenders aren’t always willing to negotiate the price of these payments after the fact.

That’s where refinancing comes in handy. Just because your current lender isn’t cool with lower monthly payments doesn’t mean that someone else out there wouldn’t be amenable to them.

Just be careful. Smaller payments are great, but it means you’re making more payments in total, and the more discrete payments you have to make, the more that means you’re paying in interest.

If you can afford your original payments, it might be a good idea to stick them out. But if you need the help, refinancing might help make your debt a little more feasible.

2) When You Think You Can Get a Lower Interest Rate

Part of what make bad loans, well, bad are the very high interest rates that often come with them. If you couldn’t avoid them the first time around, you might have better luck the second.

Lowering your interest rate by refinancing your loan is usually a good thing, but there are exceptions. 

Namely that, if your monthly payments aren’t similar or higher to what they were before, you might find yourself once again paying more over time -- even with a lower interest rate, more payments can easily mean more total interest being paid.

3) When You Can Afford to Pay It Off Faster Than You Expected

The last great reason to refinance your loan is if you think you can afford to shorten your repayment terms. If you think you can afford higher monthly payments than you’re currently paying, then odds are that you can get a loan with a much better interest rate than what you have.

In all of these cases, don’t take our word for it -- you want to consult a mortgage professional or an accountant to help you make these kind of big financial decisions.

But if there are signs that one of the above situations applies to you, that’s a good indication that you should start thinking about whether refinancing a personal loan is right for you.

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