How to Refinance a Personal Loan

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Updated: May 17, 2024

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Refinancing a personal loan involves replacing an existing loan with a new one, often to secure better terms or a lower interest rate. This financial move can lead to significant savings, reduce monthly payments or adjust the loan's term to better suit one's financial situation.

Anyone can refinance a personal loan provided they meet the lender's requirements. However, it's helpful to understand how it works and its advantages and disadvantages to determine if this option aligns with your financial goals and circumstances.

Key Takeaways

Personal loan refinancing involves getting a new loan and using the funds to repay an existing loan.

Refinancing can reduce your monthly repayment amounts and get more favorable repayment terms, but it's not for everyone.

Refinancing entails prequalification, shopping around, application submission and using the funds to clear your old loan.

What Does It Mean to Refinance a Personal Loan?

Refinancing a personal loan is a financial strategy where you replace your current loan with a new one, often with different terms. This process involves taking out a new loan and using it to pay off the existing one. The new loan typically comes with terms that are more favorable to your current financial situation, be it a lower interest rate, a different loan term or both.

By refinancing your personal loan, you can make your debt easier to manage. It can help in various ways, such as reducing your monthly payments, which can be particularly beneficial if your financial situation has changed since you first took out the loan. For example, if interest rates have dropped or your credit score has improved, you may qualify for a lower rate, which can reduce the amount you pay over the life of the loan.

Additionally, refinancing can adjust your loan's term length. If you extend the duration of your loan, your monthly payments might decrease, making them more manageable in your current budget. However, this might lead to a higher total interest cost over time.

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CAN YOU REFINANCE A PERSONAL LOAN WITH THE SAME LENDER?

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. However, it's best to check with the lender to ensure you qualify for refinancing.

Pros and Cons of Refinancing a Personal Loan

Before refinancing a personal loan, weigh its advantages and disadvantages to understand how it aligns with your financial goals and whether it's the right move for your situation.

Advantages of Refinancing a Personal Loan

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    Lower Interest Rates

    Refinancing can secure a lower interest rate, especially if your credit score has improved since you took out the original loan. A lower rate reduces the overall amount you'll pay over the loan's life.

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    Reduced Monthly Payments

    Refinancing for a lower interest rate or a longer term can make your monthly payments more manageable. This can free up cash for other expenses or savings.

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    Larger Loan

    If your financial situation has improved, refinancing can provide access to a larger loan amount. This could be useful for covering additional expenses or other purposes.

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    Change in Loan Terms

    Refinancing offers flexibility to change your loan's terms. Whether you need a longer term for lower payments or a shorter term to get out of debt faster, refinancing provides this option.

Disadvantages of Refinancing a Personal Loan

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    Refinancing Costs

    There are often costs associated with refinancing, like origination fees and prepayment penalties. These expenses can offset the savings from lower interest rates.

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    Extended Loan Term

    If you extend your loan term to lower payments, you might end up paying more in total interest over time. This could make the loan more expensive in the long run.

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    Impact on Credit Score

    Applying for a new loan involves a hard inquiry on your credit report, which can temporarily lower your credit score. This is a relevant factor to consider, especially if you plan to apply for more credit soon.

When to Refinance a Personal Loan

Refinancing a personal loan can be wise if you're seeking lower interest rates or more favorable loan terms. That said, it's helpful to evaluate certain factors to determine whether refinancing makes the most financial sense for your current situation.

When Refinancing a Personal Loan Is a Good Idea

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    Your Credit Score Improved

    If your credit score has increased since you took out your original loan, refinancing can help you secure a lower interest rate. Generally, a credit score of 670 or higher is considered good and indicates to lenders that you're a lower-risk borrower. This improvement can result in significant savings over the life of your loan.

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    You Need Lower Monthly Payments

    Refinancing can extend the term of your loan, leading to lower monthly payments. This can be particularly helpful if your financial situation changes, like losing your income or investments. However, it's important to remember that extending the loan term might result in higher total interest costs over time.

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    You Want to Pay Off Your Loan Faster

    If you wish to clear your debt quicker, refinancing to a shorter loan term can help. This might mean higher monthly payments, but you'll save on interest in the long run and become debt-free sooner. It's an excellent strategy if you can afford the increased monthly payments.

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    You Don't Have Access to Alternatives

    Refinancing can be a wise option if other forms of credit aren't available to you. This is particularly relevant if refinancing offers better terms than your current loan or any other credit options you might have. It provides a way to restructure your debt under more favorable conditions, even when other avenues are closed.

When Refinancing a Personal Loan Is Not a Good Idea

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    Your Loan Balance is Minimal

    Refinancing might not be cost-effective if the remaining balance on your loan is small. The costs associated with setting up a new loan, such as origination fees or potential prepayment penalties on your current loan, can outweigh the benefits of refinancing a small amount. In such cases, the savings gained from a potentially lower interest rate may be minimal compared to these costs.

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    You Can't Get a Lower Rate

    Refinancing is most beneficial when it leads to a lower interest rate. If your credit score hasn't improved or market rates have risen since you took out your original loan, you might not qualify for a lower rate. In this case, refinancing could lead to higher overall costs, making it an unwise financial decision.

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    You Are Almost Done Paying Off Your Loan

    Refinancing might not make sense if you're nearing the end of your loan term. The closer you are to paying off your loan, the less interest you have to pay. Refinancing for a new loan, especially if it extends the term, could mean paying more interest over time, even if the monthly payments are lower.

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.

1
Determine the Amount You Need

Assess the total amount you need to borrow to pay off your existing loan. This includes considering any additional funds you might need on top of your current loan balance, including origination fees and prepayment penalties. Knowing the exact amount helps you choose the right loan and avoid borrowing more than necessary.

2
Check Your Credit Score

Your credit score plays a significant role in determining the interest rate and terms you'll receive. You can obtain a copy of 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. Make sure to review it for accuracy and understand your credit score. You may qualify for better rates if your score has improved since your original loan.

3
Explore Lenders

Research various lenders, including banks, credit unions and online lenders. Each lender has different rates, terms and fees, so it's beneficial to explore a wide range to find the best fit for your needs. Consider lenders you've worked with before, as they may offer favorable terms to returning customers.

4
Get Prequalified

Many lenders offer the option to get prequalified, which gives you an idea of the rates and terms you might receive. Prequalification is typically done online and involves a soft credit check, which won't impact your credit score. This step helps narrow down your options without committing to a specific lender.

5
Compare Loan Offers

Once you've received prequalification offers, compare the interest rates, terms and fees from different lenders. Pay attention to the total cost over the life of the loan, not just the monthly payment. This comparison will help you find the most cost-effective option.

6
Submit Loan Application

Complete the loan application process with the chosen lender after selecting the best offer. This will involve providing identification and financial information, including pay stubs and income statements. You will also undergo a hard credit check, which could temporarily affect your credit score. Ensure all information is accurate and complete to avoid delays.

7
Make Payments on the New Loan

Once your refinancing is approved and you pay off your old loan, start making payments on the new loan. Setting up a budget to accommodate these payments is essential to maintain your financial health. Stay on top of these payments to avoid any negative impact on your credit score. You may consider autopay, if available, to facilitate a more streamlined repayment schedule.

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EXPERT TIP

Understand the differences between refinancing a personal loan and debt consolidation:

Refinancing:

  • Applies specifically to an existing personal loan. The goal is to get a new loan with more favorable terms to replace the original loan.
  • Refinancing aims to keep borrowing the same amount at a lower rate over the same term.

Debt Consolidation:

  • Consolidates multiple debts (credit cards, loans, etc.) into one new loan or line of credit and uses the new loan to pay off balances from various sources.
  • Consolidation involves taking out an entirely new loan to replace various debts.
  • Consolidation may extend term lengths to lower payments.

— Alvin Yam, CFP®

How Refinancing a Personal Loan Affects Credit

When you apply for personal loan refinancing, a credit check is a standard part of the process. This check is a hard inquiry, which can temporarily lower your credit score. Hard inquiries indicate to credit bureaus that you're seeking new credit, which can be interpreted as taking on more financial risk. Each inquiry might reduce your score slightly, as it reflects potential new debt.

However, multiple inquiries for the same type of loan within a certain period can be treated as a single inquiry. Depending on the credit scoring model, this can range from 14 to 45 days. This consolidation is designed to allow you to shop around for the best rates without incurring multiple penalties on your credit score, minimizing the impact of refinancing on your credit health.

FAQ About Personal Loan Refinance

MoneyGeek answered some common questions about refinancing personal loans to help you understand what it entails and how to refinance a personal loan.

What are alternatives to personal loan refinance?
What types of refinancing options are out there?
How will a personal loan refinance affect monthly payments?
What are the fees involved in personal loan refinancing?
How long does it take to refinance a personal loan?
What kind of documents do I need to refinance?
Is there a general rule of thumb for how long you should plan to keep a loan before refinancing?

About Christopher Boston

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Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.

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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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