How Should You Refinance Your Installment Loan?

by Jim Hughes   July 22, 2019

We don’t need to tell you that it’s a bad idea to sign up for a high-cost loan. You knew it when you did it, but for lack of other options, you took the money that was available to you, knowing full well you would have a hard time paying it back. The good news is that you might be able to refinance your installment loan.

Learn what needs to happen before refinancing an installment loan.

An installment loan is a fixed-rate, closed-end form of credit that you pay back in portions over time. Technically, any loan not paid in full all at once is an installment loan. While the term may refer to low-rate, personal loans, it is more often known for having:

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  • higher interest rates
  • relatively shorter loan terms when compared to personal loans
  • an approval process that may not automatically disqualify those with bad credit

Can you refinance an installment loan? Many borrowers ask this question after accepting cash advance at a high-interest rate and later improving their credit score. The short answer is yes. You may be able to renegotiate your terms or transfer the debt to a new lender with more favorable rates.

Advantages of Refinancing

When Susan Boenau was leading the Consumer Affairs Section of the Federal Deposit Insurance Corporation, she explained the benefits of refinancing loans. She explained that you save money when you get a lower interest rate or a lower monthly payment.

That’s the main advantage of renegotiating debt – saving money. Another benefit is the convenience of combining several payments into one.

However, Boenau cautioned that “refinancing does not always equate to saving money or better terms.”

It’s important to make sure that the new rate is a fixed rate. Also, to save money, you will be able to pay back the loan before the end of an introductory rate. It’s sad, but some borrowers think they are getting a great deal on a refinanced loan only to find themselves paying more thanks to fluctuating interest and hidden fees.

What Are the Consequences?

Ideally, you will end up paying less for your refinanced loan. Of course, there can be less favorable outcomes. If you are looking to refinance a Money Mart installment loan or one from a similar provider, it is important to ask the lender the following questions to make sure you are going into the process with both eyes open:

  • Is the lender offering me a fixed-rate or variable-rate loan? A variable-rate can be risky because the rate can go up, potentially higher than what you were paying on your previous loan. You should ask the lender how often they change the rate and if there is a maximum rate.
  • What are the penalties for missing a payment? Some lenders will increase the interest rate if you miss a payment, and they may also charge fees on top of the higher rate.
  • Am I privy to any discounts? E.g., some lenders may charge you a lower interest rate if you set up automatic withdrawals.
  • When, if ever, will my unpaid interest be added to the principal of my loan? Capitalization, as this process is called, can make a loan balloon in size very quickly.
  • Are there any penalties for paying off the loan early? Not having prepayment penalties means you can avoid interest and pay the loan off sooner than planned.

Knowing the answers to these questions will help you understand the potential consequences of refinancing your loan.

5 Ways to Refinance

Here are the main ways to refinance an installment loan.

Those payday loans with bad credit have fewer refinancing options. However, if you were paying back your loan on time, you may have been able to improve your credit score. Other ways to improve your credit score include having a good debt-to-income ratio, longer credit history, fewer hard credit inquiries, and a good mix of credit types.

If you are in a better situation now than you were when you took out the installment loan, one more of these refinancing products may be available to you:

  • Renegotiate with your current lender – if your lender thinks you are about to pay off the loan and take the debt somewhere else, they may be willing to renegotiate the rates to keep you on as a borrower.
  • Credit cards – using a balance transfer credit card is one option to decrease the interest rate temporarily. Like we mentioned earlier, though, be careful not to take longer than the introductory period to pay off the loan, as the APR will likely shoot up after that point.
  • Debt consolidation – there are companies that will pay off your debt for you, and then you pay that company going forward.
  • Debt relief – the company will negotiate to have some of your loans forgiven. Debt relief will ruin your credit score for about seven years.
  • A new loan – you may find another lender with better rates. Even if they do not specialize in balance transfers, you may still be able to use their cheaper loan to pay off your older one.

You may feel trapped if your current contract has a prepayment penalty. However, you should factor in the cost of the penalty with how much you can save through a new loan. Switching may end up being the better option.

Paying back a high-interest loan is expensive, but it’s not always necessary. Can you refinance an installment loan? A lot of the time the answer to that question is a resounding “yes.” Even if you haven’t built a positive credit history since you took out the small installment loan, you can make small changes now to improve your credit score:

  • Pay down your balances
  • Fix any errors in your credit report
  • Closeout your collection accounts

The first step toward a brighter financial future is getting out of debt. One way to make that easier is by refinancing your installment loan.

Jim Hughes   OpenCashAdvance Marketing Manager
Personal Finance
Jim Hughes remembers checking his first email on the original BlackBerry 850 nearly 20 years ago. It was spam, and he fell for it. Even so, he’s been on the beat every day since, following the ebbs and flows of financial technology. Look to Jim for insider exclusives on shorter-duration loans, installment loans, and other popular products in fintech today.
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