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Written byShaun McGowan
Ok, so you’ve got a personal loan and want to either reduce the payments or find yourself a better interest rate.
We’ve all seen interest rates come down a lot over the last couple of years.
Let’s walk through the good and the bad of refinancing and how you could potentially get yourself a better deal.
First, some basics.
The actual process of refinancing your loan goes like this:
It’s a little like debt consolidation, but with only a single loan to work with.
Essentially, you get a new loan to repay the old loan, and repay your new loan (saving money in the process).
Most people don’t refinance their loan due to either contractual restrictions (e.g. break fees) or a lack of decent, usable information for consumers.
While we can’t help with the first two, we can help with the personalised comparison part (and help you avoid falling into any future traps!).
Refinancing means you can renegotiate a better loan contract, but instead of only dealing with your existing lender, you’re sorting through the best offers from all available lenders on offer.
Here’s a common refinancing scenario:
This is a frustrating cycle for many first-time borrowers. No clear information or transparency on the fine details of a loan means you could be stuck with a loan that isn’t working for you.
Maybe you want more money in the short-term? You can do this by reducing your repayments over a longer term.
Maybe you just got a new job and want to increase your repayments with a better rate, repaying your loan in half the time?
Low rates aren’t great if you’ve got costly fees. Reduce, or eliminate, fees from your new loan to cut down on unnecessary monthly costs.
For those looking for a bit more freedom, this means flexible repayments (choosing which date to pay and the frequency) and the option to make extra repayments without getting penalised.
Not great if you’re looking to get debt-free sooner, but extending your term with a lower rate can drastically reduce repayments, making short-term debt easier to manage.
If you want to refinance a personal loan, it's a very similar process to when you first applied.
The hardest bit is figuring out how to compare new offers against your existing debt.
Make sure you only compare loans of the same type, over the same term and for the same loan amount.
This way, you’ll be able to use a comparison rate to quickly see which loan is the best.
A comparison rate is the most accurate way to compare loans. It is the interest rate and fees loaded together into one rate. Each lender must provide this - it’s the law. It’s the fastest way to know which is the best deal. The lowest comparison rate is the lowest price.
Before you sign up for a new loan, double-check whether your existing loan has any fees or charges to exit.
Once you’ve compared your existing loan and costs with your new loan offers, it’s time to see if you can save some money and get a better deal. If you do, the only thing left to do is apply.
If you have used our matchmaking process, you can select the lender of your choice and apply directly.
You will be directed to the lender’s website and need to supply all documentation as you normally would when applying for a new personal loan, which will most likely include:
Loan Amount: --
Establishment Fee: --
Total Interest Paid: --
Ready for the next step?
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In some cases, yes. While your lender will inevitably prefer to keep you on your current loan rather than give you a better deal, they may allow you to refinance your loan in order to keep your business. That’s why if you’re considering refinancing it may be a good idea to approach your current lender after you’ve shopped around to see if they’ll match the best deals you find.
Yes, many lenders offer unsecured personal loans that are ideal for refinancing. Keep in mind these may have higher interest rates than secured loans but offer far greater flexibility.
The best time to refinance is when you’ll be able to save money or it makes your life easier. Just keep in mind that it’s not always possible to refinance inside the first 12 months of your loan term.
Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.
*Information about comparison rates Comparison rates are designed to allow borrowers to understand the true cost of a loan by taking into account fees and charges, the loan amount and the term of the loan. The comparison rate is based on an unsecured fixed rate personal loan of $10,000 over 3 years. WARNING: Comparison rates are true only for the examples provided and may not include all fees and charges. Different terms, fees or loan amounts might result in a different comparison rate.