Most people know they can refinance a mortgage—that is, replace an existing loan with a new one that may offer better terms. But did you know you can also refinance personal loans, including auto loans, credit cards and student loans?
“Refinancing a personal loan may save you money, especially if you get a lower interest rate, a lower monthly payment or other benefits,” notes Susan Boenau, Chief of the FDIC’s Consumer Affairs Section. “However, refinancing does not always equate to saving money or better terms.”
Understand potential pitfalls in refinancing a personal loan. For example:
- You may have a higher APR than what you were originally paying when the promotional rate ends.
- Closing a credit card account also reduces your available credit and may adversely affect your credit score.
- A balance transfer may result in your account having multiple interest rates.
- You may be assessed a prepayment penalty if you refinance a loan before it matures.
- If your credit score is low, wait to refinance until you can raise it.
For more information, click here.
- Ask students to prepare a list of similarities and differences between a home equity loan and refinancing personal loans.
- Ask students to use the Internet to obtain information about refinancing.
- What are the possible advantages and disadvantages of refinancing?
- What are your legal remedies if a credit reporting agency engages in unfair reporting practices?