Best Way to Refinance a Personal Loan in a Recession

The economy has been in the news lately, and the word "recession" keeps cropping up. We'll discuss a possible recession, interest rates, refinancing a personal loan, and how you can lower your interest rate. 

Are we in a recession?

A recession is a "significant, widespread, and prolonged downturn in economic activity." Is the U.S. currently in a recession? A recession is typically defined as two consecutive quarters of negative gross domestic product (GDP). GDP is the total monetary or market value of all the finished goods and services produced within a country in a specific period of time. 

So is the U.S. in a recession? Most experts say no. The US GDP grew by 2.6% in the last quarter of 2022. But many economists are expecting a recession within the next 12 months. 

What happens to interest rates during a recession?

In an effort to cool inflation which has been at a 40-year high recently, the Federal Reserve has been raising interest rates. But what happens to interest rates if we do tip over into a recession?

During a recession, the Federal Reserve will typically lower interest rates in an effort to stimulate spending and encourage businesses to invest and expand. But there is no guarantee the Fed will do so, and if it does, the rate cuts typically happen at the start of the recession. As the economy recovers, the Fed often increases interest rates again. 

During a recession, loans may become cheaper thanks to lower interest rates. 

Paying off debt during a recession can be a risky proposition. While paying off high-interest debt saves money over time, during a recession or other times of economic uncertainty, it may not be the best move in the short term. If you have a lot of job security and a healthy emergency fund, it's less risky, but if you don't have those things, it can be better to hold onto your cash in case of a job loss. 

How does refinancing a personal loan work?

Refinancing a personal loan means applying for a new loan with the current lender or a new one and using the money to pay off the old loan. The reason for refinancing is to get a lower interest rate or other more favorable terms for the loan. A lower interest rate can save money over the life of the loan. 

Some aggregator sites allow you to enter some basic personal information and see offers to refinance a personal loan. This kind of loan term, "window shopping," is the best way to refinance a personal loan. It does not impact your credit score immediately and gives you a range of options. Potential lenders do what is known as a "soft" credit pull when you provide your information.

If you see an offer you want to take, you can formally apply for the loan. You may be prompted to provide some additional information. At this point, the potential lender does what is called a "hard" credit check. A hard credit check does impact your credit score. You'll see a drop of a few points, which is temporary. It goes on your credit report as a credit inquiry, one of the five things that make up your credit score. 

How to lower your interest rate

Not everyone will be eligible for a lower interest rate on a loan. The primary determining factor is your credit score. The higher your score, the lower the rates you'll be offered. You don't have to have a perfect credit score to get the best rates; typically, anything over 760 is good enough. 

Before shopping for a new loan, check your credit score. Many banks and credit cards provide free credit scores. Has your score improved since you took out the initial personal loan? If so, shopping around for a new loan at a better rate can be worthwhile.

If not, you can work on building or improving your score before refinancing. Upwardli can help with our credit builder plan. You’ll get instant pre-approval with no credit check and no deposit. Each account includes a line of credit designed to help you build credit quickly. We round up your spare change from everyday purchases and put that change to work, building your credit and savings while reporting to all three credit bureaus. 

Your spare change and cash rewards build up in an FDIC-insured bank account from which you can easily withdraw funds anytime. Upwardli has also created dozens of helpful resources to help you learn the ins and outs of the U.S. financial system.