Can You Refinance a Personal Loan?
Yes, it’s possible to refinance a personal loan in Canada.
Refinancing an existing personal loan could reduce the amount of interest you’re paying or yield a more favourable loan term.
What does it mean to refinance a personal loan?
When you refinance a personal loan, you replace an existing loan with a new one, usually with different terms and/or with a lower interest rate. The new loan pays off the old one, and you continue repayment under the terms of the new loan.
The goal of refinancing a personal loan is typically to get a better interest rate or reduce the length of the repayment period. Both cases lend themselves to faster loan repayment, which saves money and provides a path to less debt.
Types of loans that can be refinanced in Canada
Pretty much any type of loan can be refinanced, including mortgages, personal loans, car loans and private student loans.
How to refinance a personal loan
If you’ve decided to refinance your personal loan, here are some steps you might take.
Compare lenders. Firstly, it’s wise to shop around and compare different personal loan options. Pay close attention to rates, fees and loan terms. If you’re a Borrowell member, you can use the online marketplace for comparison.
Calculate the cost of refinancing. In addition to comparing rates and fees, you’ll also want to know if your current lender charges any prepayment fees. Lots of fees could cut into the savings from a lower interest rate.
Apply for a loan. Depending on the lender, you could get approved for a new personal loan in as little as a day. It may be worth seeing if you can get a no-obligation personal loan quote before applying so that you’ll have a better idea of what loans, rates and terms you’d qualify for.
Pay off your original loan. Use funds from your new loan to completely pay off your old, less favourable loan. Depending on the lender, you may be able to arrange for this to happen automatically at closing.
Confirm the old loan account is closed. Following the transfer of funds to your previous loan account, contact the lender to confirm the loan is completely paid off and that the account is now closed.
Why refinance a personal loan?
Before altering the terms of any loan, it’s always a good idea to carefully consider your financial goals and analyse whether refinancing can help you attain them. Here’s some reasons refinancing a personal loan might be desirable
Pay less interest. If personal loan interest rates have decreased since your loan was dispersed, refinancing may save you a significant amount of money (depending on how much of your loan you still have to pay off). Even if interest rates have not decreased significantly since you applied for the loan, it may still be worth refinancing if your credit score has markedly improved. A higher credit score means you may be eligible for a better rate, as lenders will view you as less of a risk.
Extend your repayment period. If you’re finding it difficult to make payments, you may want to refinance your loan to extend your repayment term. Though you’ll end up paying more in interest over the course of your loan, a longer term could make payments much more manageable and prevent you from defaulting.
Get out of debt faster. If your salary has increased or you’ve come into some money, you may want to refinance a loan to shorten your repayment period. With a condensed repayment schedule, your monthly payments will increase, but you’ll pay the loan off more quickly and save money on interest.
Frequently asked questions
Can you refinance a personal loan with the same bank?
Can you refinance a personal loan with the same bank?
Yes, it may be possible to refinance your existing personal loan with the same lender. You would need to speak to your current lender about re-qualification requirements, interest rates, terms and prepayment fees, if applicable.
Does refinancing a personal loan hurt your credit?
Does refinancing a personal loan hurt your credit?
Refinancing a personal loan may have a temporary negative impact on your credit score. When you apply for a refinance loan, the lender will likely perform a hard credit check to determine your creditworthiness. This can cause your score to dip for a short time. However, if you manage the refinanced loan responsibly by making on time payments, a refinanced loan could help strengthen your score over time.
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