Beware of this pitfall if you use a personal loan to refinance debt
Don’t refinance your debt with a personal loan until you read this.
- Personal loans can be a great way to refinance debt.
- You can use a personal loan to pay off other high interest loans.
- You’ll want to make sure you don’t extend your payment time much longer.
If you have a lot of debt, you might be interested in using a personal loan to refinance it. This involves applying for a new personal loan from a lender and shopping around for the most competitive rate you can find. Once you have been approved for the loan, you use the money given to you to pay off your other more expensive debts.
Since your personal loan can change your financing terms in a favorable way, this approach can often save you a lot of money and make it easier for you to get out of debt. But there is one pitfall you need to watch out for to make sure your loan will save you money. You can’t just assume you’ll always be better off if your new loan has a lower rate.
Be on the lookout for this problem when refinancing with a personal loan
If you want to make sure your personal loan saves you money through refinancing, the only thing you need to pay attention to beyond the interest rate is the repayment term of your new loan.
You will usually have the choice of the length of the repayment period when you take out a personal loan. It can range from as little as a year or two to five or 10 years or sometimes even longer. And loans with longer repayment terms can seem very attractive because between the lower rate and the fact that you stretch your repayment schedule, you can end up with very low monthly payments.
The only problem is that loans with long repayment terms can end up costing you more than your existing debt would have cost you, even if you lowered your rate. Say, for example, you have two years left to pay off the debt you are refinancing and you get a new loan with a 10-year repayment schedule.
The fact that you’ve added eight years of interest payments per refinance means that your new loan will almost certainly be more expensive, even if you’ve managed to lower your interest rate significantly.
How to make sure your refinance loan saves you money
If you want to be sure that your new refinance loan is a good deal and the right choice for your finances, you should try to keep the same payment schedule when you refinance or even shorten your repayment period if possible.
If you can choose the personal loan with the shortest repayment schedule that fits into your monthly budget, you can save a lot of money by lowering your rate and paying bank interest for less time. You won’t have to worry about years of extra interest adding to your total costs. And you’ll benefit from being able to pay off your debt as soon as possible so you can start using your money for other things.
You should shop around with several different personal lenders before deciding who to refinance with, and by considering both interest rate and repayment time during this process, you will hopefully get a loan that’s right for you. .