Refinancing a personal loan entails applying for a new loan and using it to repay an existing loan. Anyone can refinance a loan provided they meet the lender’s requirements. Personal loan refinancing has several potential advantages, including reduced monthly payments and extended loan terms.
You may refinance a personal loan soon after you start paying an existing loan, but you may not get the best deal. It may be ideal to refinance if your goal is to reduce your payment amounts or if you do not have alternative sources of funds.
Personal loan refinancing may lower your credit score by a few points since lenders conduct a hard credit inquiry.
Key Takeaways
Personal loan refinancing involves getting a new loan and using the funds to repay an existing loan.
Deciding whether to refinance your loan depends on your financial goals. Refinancing can help you reduce your monthly repayment amounts and get more favorable repayment terms.
The refinancing process entails prequalification, shopping around, application submission and using the funds to clear an old loan.
What Does Refinancing a Personal Loan Mean?
Personal loan refinancing can help you pay off one or multiple debts using a loan that has better terms. You may opt for a personal loan refinance if you wish to adjust aspects of your outstanding loans, such as the interest rate and repayment amount, to suit your financial goals.
Lenders may offer lower monthly payments or extend the repayment duration for your new loan. For example, if you have a five-year repayment duration for your current loan, you can use refinancing to pay off the loan with a seven-year term. Doing this can reduce your monthly installments. Although longer-term loans feature lower payments, they may have higher total costs due to fees or high interest rates.
You can refinance a personal loan through any consumer lender that offers standard loans. That means you can refinance your loan with the same lender or consider other lenders, especially if they have better loan terms. Check whether you qualify for refinancing from a lender in terms of your credit score and other requirements before submitting your application.
Pros and Cons of Refinancing a Personal Loan
While refinancing personal loans may help you attain financial freedom, it is important to determine whether the advantages of refinancing outweigh the disadvantages and how applying for one may impact you financially.
- Lower interest rates
- Reduced number of payments for outstanding loans
- Favorable monthly repayment amounts
- Possibility for higher loan limits
- May come with higher interest
- Potential negative impact on your credit score
- Origination, prepayment and other fees may apply
When Is the Best Time to Refinance a Personal Loan?
Whether you need to reduce your interest rate or adjust your repayment terms, you can apply for refinancing anytime. However, you may need to evaluate factors like your credit score and review the benefits of the new loan, including reduced interest and monthly payment amounts.
One good time to consider refinancing your personal loan is after you have improved your credit score. A good credit score may qualify you for a lower interest rate. Generally, a credit score of 580 or higher is recommended. Lenders look at your loan repayment history, credit utilization rate and other factors to determine your rates. It’s a good idea to limit taking out loans and make payments on time.
Personal loan refinancing can help reduce your monthly payments through an extended repayment period. This could result from a situation like loss of income or investments. If it is difficult for you to make the payments for your outstanding loan, you can consider refinancing to lower your monthly obligation.
If you can make higher monthly payments and wish to clear your debt faster, refinancing your personal loan can be an excellent tool. An advantage of making quick payments is that you may save on interest. For instance, if your current repayment period is five years and your income increases, you can apply for refinancing and choose a shorter period, say two years, and a higher repayment amount.
Personal loan refinancing is also an excellent alternative if you do not qualify for other funding options like credit cards, lines of credit, home equity loans or peer-to-peer loans. However, you will need to confirm that refinancing can help meet the need at hand. For example, if you are renovating your home and don't qualify for a second mortgage, you could apply for a larger personal loan and use it to refinance, leaving some funds for your current financial goal.
How to Refinance a Personal Loan
If you are wondering how to refinance a personal loan from any lender, you can follow the standard procedure to begin this journey.
Refinancing your loan entails paying off outstanding debt with a new loan. Before comparing offers from your preferred lenders, you need to have an idea of the exact amount you need to repay an existing loan, including any applicable charges, such as origination and prepayment penalties.
MoneyGeek’s personal loan refinance calculator can help you estimate the total cost of your loan. After deciding the amount you need, you can reach out to your lender or log in to your personal loan account to check out the applicable fees and terms of your new loan.
Your credit score affects whether you qualify to refinance an existing personal loan from any lender, and the interest you will pay on the loan. In general, lenders will determine your terms based on your score and are more likely to quote a good rate if you have excellent credit.
Actual credit score requirements vary based on the lender. You can obtain your credit report from Equifax, Transunion or Experian. You may also check your report free of charge once per year on the Annual Credit Report website.
How much you receive and the total cost of your refinancing is based on the lender you choose. Comparing terms and rates from several lenders ensures you find the best deal on the market. You can contact new lenders and find out how much they can offer before making a decision.
Remember, a new loan may not be ideal if you will pay more in total, even if it comes with lower interest. Check for origination fees, prepayment penalties and interest rates.
Prequalification is a screening process before submitting your application for personal loan refinancing. Lenders use prequalification to determine your suitability for a loan and what terms they should offer you.
Prequalification is usually done online and does not affect your credit score. However, note that the process does not guarantee approval for refinancing.
Based on the feedback you receive from lenders at prequalification, you may select an offer that best matches your needs. Compare personal loan features like the repayment term, interest amount, applicable fees and monthly payment amounts.
You may consider other banks and online lenders, since you are not obligated to refinance your personal loan through your current lender if its offer isn’t the best.
After selecting an offer from the best lender, complete the application and submit it alongside the required documents. Typically, lenders ask for your identification and financial information, including pay stubs and income statements.
Once your application gets approved, you may receive the funds as soon as the same day or within a few days. The timing will depend on the lender.
After receiving the funds, you need to transfer them to your current lender to pay off the outstanding loan. This only applies if the lender did not pay the outstanding loan directly on your behalf or if you applied for refinancing from a different lender.
Additionally, you should note the new repayment details to avoid missing any deadlines. You may also consider autopay, if available, to facilitate a more streamlined repayment schedule.
Frequently Asked Questions About Personal Loan Refinance
MoneyGeek responded to common questions about refinancing personal loans to help you understand what it entails and how to refinance a personal loan.
The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.
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