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Life is full of financial decisions, big and small. Here, we’ll provide a framework for how to approach those moments.
People look to refinance a personal loan for a variety of reasons, namely wanting a better rate and term. Or they were approached with a loan offer or bonus promotion from another lender. Whatever the reason, there are certain considerations to keep in mind when thinking about refinancing a loan.
Before we dive into the specifics of what to consider before refinancing a personal loan, let’s take a second to discuss what refinancing even means.
Loan refinancing refers to a borrower replacing their current loan obligation with one that has more favorable terms. Essentially, the borrower takes out a new loan to pay off their existing debt and the terms of the previous loan are replaced by the terms of the new agreement.
Those more favorable terms can include a lower interest rate, lower monthly payment, a different payment structure, or a different loan term (to name a few).
The “why” of refinancing a loan is fairly straightforward – it (ideally) gives the borrower a more favorable loan option. If that sounds like an option you’d like to consider for your own loan, read on to find out the five things you should keep in mind before refinancing.
We get it: APR, or annual percentage rate, is the number that might stand out the most when considering loan options. And it’s an important number, too, as it tells you the total yearly cost of borrowing money.
Your APR includes the interest rate plus other fees. But there are a few other factors to consider when thinking about refinancing your loan beyond just lowering your high interest rate.
While the APR will factor in certain fees, it’s good to know what else a potential new lender could charge you for (or your current lender if you're refinancing at the same financial institution of your existing debt).
One of the more popular ones is an origination fee. It’s a fee charged by a lender before you receive the money you’re borrowing. It’s meant to cover certain costs associated with the processing of your loan, such as a credit check and verifying a borrower’s identification. An origination fee is often quoted as a percentage of the total loan and can be between 1% to 6%. The exact percentage is determined based on a few factors, including your creditworthiness and size of the loan.
Other fees that should be on your radar include prepayment penalties; late payment fees, which could be a flat fee or a percentage of your balance; and payment processing fees.
Here’s where some number crunching could help.
Say you go to refinance your personal loan and a potential new lender offers you a lower monthly payment. Sounds like a deal, right? But what if that is offset by a longer repayment term on your loan? You could end up paying more interest in the long run.
While that new monthly payment could fit nicely into your monthly budget, do the math (or use a loan calculator) to determine whether or not you’re saving in the long run.
Before you shop around, you might want to check your own credit score first to be sure it’s in good shape to receive offers with competitive rates.
There are many things that can impact your credit score, so being aware of those (and where your credit currently stands) can help you build a high credit score, or maintain a great score you already have.
Some lenders, like Marcus, offer personal loans with certain features and benefits geared toward giving borrowers more flexibility and control over how they manage their debt.
Marcus personal loan customers have the ability to change their payment due date up to three times over the life of a loan, so their loan payments can fit within their monthly budget.
Marcus personal loans also offer on-time payment rewards. Customers are allowed to defer a monthly payment for one month after making 12 consecutive monthly payments on their loan in full and on-time. And, of course, Marcus never charges any fees and our loans come with fixed rates – meaning your APR will never change.
This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.