September 28, 2022
  • September 28, 2022

Before you finance a personal loan, do so

By on April 4, 2022 0

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This is an option worth looking at.

Key points

  • Refinancing a personal loan may result in a lower interest rate.
  • Before you go this route, there may be another type of refinancing that is worth exploring.

The great thing about personal loans is that they allow you to borrow money for any purpose. For example, a mortgage is limited to the use of these funds to buy a home. With a personal loan, you can borrow money to start a business, take a vacation or pay off some credit card debt.

The interest rate on a personal loan will basically depend on factors such as your credit score and the amount you borrow. Market conditions generally also affect the interest rate on your loan.

There may come a point where you can refinance your personal loan and lower the interest rate you pay. But before you take this step, it’s worth taking a look at other types of refinancing.

Should you use your equity to pay off your debt?

Nowadays, US homeowners are sitting at record levels of home equity due to soaring property values. This means you can have a fairly easy time qualifying for cash-out refinancing.

When you regularly refinance your mortgage, you borrow the exact amount you owe against your existing home loan. With cash-out refinancing, you borrow more than your remaining mortgage balance and can use that extra cash for any purpose. In this regard, cash-out refinancing works similar to a personal loan.

So why would you refinance your mortgage instead of a personal loan? It’s easy. Even if your mortgage interest rate is now higher than it was last year, you can still get a lower refinancing rate for your paycheck than you would with a personal loan. If you choose to refinance your paycheck, you can use your proceeds to pay off a personal loan and then pay off your mortgage at an interest rate lower than what you are paying today.

Does cash-out refinancing have any disadvantages?

Refinancing your paycheck is a loan for which you are responsible. That’s why it’s important to borrow carefully.

If you limit the amount you borrow as part of your payout refinancing to your mortgage remaining balance plus your personal loan balance, you won’t put yourself at a disadvantage as these are debts for which you are now responsible. What are you not However, what you want to do is go overboard with refinancing your paycheck just because you can.

Suppose you owe $ 200,000 in a mortgage and $ 10,000 in a personal loan. In that case, you really don’t need to borrow more than $ 210,000. But if you borrow $ 230,000 just because the option exists, you’ll have a much higher monthly mortgage payment to keep up. So unless there is a reason to take another $ 20,000 cash from home, stick to the lower amount.

While personal loans may offer competitive interest rates, you can get even more savings on interest by using withdrawal refinancing to settle your personal loan balance. If you are going to go this route, shop around with the various refinancing lenders to make sure you are getting the best rate you are entitled to.

The Ascent’s best personal loans for 2022

The Ascent team checked the market to bring you a shortlist of the best personal loan providers. Whether you want to pay off your debt faster by lowering your interest rate or need extra money for a big purchase, these best-in-class picks can help you achieve your financial goals. Click here for a full rundown of The Ascent’s best picks.