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How to Refinance a Personal Loan


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Personal loans are a popular way to borrow money for a variety of purposes. Whether you’re consolidating existing debt, paying for a home improvement project, or trying to go on dream vacation, a personal loan can get you the cash you need.

Often personal loans can have terms of five years or even longer. A lot can change in that time, so you may find yourself wanting to refinance your personal loan to change the loan’s term.

How to Refinance a Personal Loan

If you’re looking to refinance a personal loan, these are the seven steps you should take.

1. Run the Numbers

The first step to refinancing a personal loan is to figure out whether refinancing is right for you and to run the numbers.

First, think about your goals for refinancing. 

  • Lower Monthly Payment. Increasing the term of your loan will reduce your monthly payment but increase the overall cost of the loan. You may also drop the monthly payment by holding the term steady but reducing the interest rate.
  • Lower Overall Cost. Shortening the loan’s term or reducing its interest rate will usually save you money by reducing the overall interest charges on the loan.
  • Faster Payoff. You can shorten the term of your loan when you refinance, which means you’ll pay it off more quickly.
  • Convert an Adjustable-Rate Loan to a Fixed-Rate Loan. Adjustable-rate loans can be unpredictable, with payments that change as interest rates change. Refinancing to a fixed-rate loan offers a more predictable payment schedule. 

Next, you have to do some math and read the fine print of your existing loan. First, check to see if your loan has a prepayment penalty. If it does, that adds to the cost of refinancing.

Finally, look at your loan’s payoff amount and current monthly payment. If you’re trying to save money, you’ll need to refinance to a loan with a lower monthly payment or one that will cost less in the long run.

2. Check Your Credit Score

If you’ve run the numbers and decided that refinancing might be a good idea, the next step is to check your credit score.

There are plenty of services out there that will let you check your credit score for free. Before you apply for any type of loan, you should take a look at your credit report. At a minimum, you should check it for errors that could impact your score and make it harder to qualify for loans at a good rate.

If you have some time before you want to refinance, you can use the time to try to improve your credit score based on the items you see in the credit report. For example, if you see that high levels of debt or credit card utilization are damaging your score, you can use the time to pay back some of your debt.

3. Get Prequalified

When you’re looking to get any type of loan, whether it be a debt consolidation loan, mortgage, or a personal loan, you should shop around for the best deal.

The first part of shopping around is to get prequalified. Find a few lenders that have appealing loan offers and go through their prequalification process.

During this process, the lender will confirm your eligibility for a loan to consolidate or refinance your old loan. You’ll have to provide some basic financial information about yourself. The lender will be able to give you preapproval with preliminary rate and fee details that you can use to choose the best offer.

Getting prequalified won’t involve a hard credit inquiry, so there’s no harm in checking with multiple lenders to try to find a better rate or better terms.

4. Compare Offers

Once you’ve gotten prequalified with multiple lenders, you’re ready to start comparing the loan offers. The factors to look for include:

  • Interest Rate. The lower the annual percentage rate of the loan, the less interest will accrue. That means a lower monthly payment and lower overall cost for the loan.
  • Loan Term. A longer loan repayment term means a lower monthly payment but a higher overall loan cost because there will be more time for interest to accrue. If your personal loan refinance goal is a lower monthly payment, this is a good thing. Alternatively, if you want to save more money overall, a shorter term will have a higher monthly cost but leave less time for interest to accrue.
  • Fees. Many lenders add additional fees to their personal loans, including origination fees, loan application fees, and early repayment fees. The fewer fees you have to deal with, the less expensive your loan will be.
  • Other Considerations. Some lenders offer special deals or promotions, such as an interest rate reduction when you sign up for autopay from a bank account or perks for banking customers who also get a loan. Take these into account when choosing a lender.

5. Choose a Lender and Apply

After you’ve compared loan offers and chosen the best one for your situation, it’s time to submit a loan application. Select your desired term and apply for an amount equal to the payoff amount of your existing loan.

Applying for a loan will involve many of the same steps as getting preapproval, but the credit check will be a bit more in depth. The lender will want proof of the information you provided during the preapproval process so that it can be certain of your creditworthiness.

Be ready to provide pay stubs and other financial information, like bank statements and loan statements from any other accounts you have.

6. Pay Off the Original Loan

Once you’ve received the money from your new personal loan, you’re ready to pay off your existing loan. Contact your current lender to find the best way to submit a loan payment for the remaining balance of your personal loan.

Once you use the new personal loan funds to pay off the old loan, the refinancing process is complete.

7. Start Making Payments on the New Loan

After you pay off your old loan, you’ll be left with just the new loan that you used to refinance the previous one. Just like before, you’ll get a bill each month from your new lender.

Start making payments on your new loan just as you were paying your old loan. Over time, you’ll pay down your loan balance until you’ve paid off the new loan in full.


Should You Refinance Your Personal Loan?

If you have the opportunity to refinance your personal loan, you need to consider both the advantages and disadvantages before making the decision.

Pros of Refinancing a Personal Loan

If you’re able to refinance your personal loan, there are lots of reasons to do so. Generally, the benefits are about saving money, either overall or on a monthly basis.

  1. Lower Your Monthly Payment. Reducing the interest rate of your loan or extending its term can help you reduce your monthly payment, giving you more flexibility in your budget.
  2. Save Money in the Long Run. Refinancing to a lower interest rate or shorter loan term can reduce the amount of interest that accrues on your loan, saving you money overall.
  3. Consolidate Multiple Loans. If you have more than one personal loan, you can refinance all of them into a single loan. That makes life easier by turning multiple payments into one.
  4. Change Your Loan’s Interest Rate. Refinancing means replacing your existing loan’s interest rate with a new one. If you have improved your credit since you took out your previous loan, refinancing can often mean reducing the rate. You can also exchange a variable rate with a fixed one.

Cons of Refinancing a Personal Loan

Refinancing isn’t a panacea, so it’s important to consider the drawbacks of refinancing before you go for it. Depending on your situation, you could wind up paying more by refinancing.

  1. Higher Overall Cost. If you’re extending the term of your loan to reduce the monthly payment, you’ll usually wind up paying more in the long run because there will be more time for interest to accrue.
  2. Upfront Fees. Refinancing can involve upfront costs,which may make it difficult to afford. You’ll have to pay any prepayment penalties that your current lender charges plus any origination fees your new lender charges.
  3. Increased Interest Rate. If your FICO score has dropped since you got your original loan or personal loan rates in general have risen, you could wind up refinancing your loan to one with a higher interest rate. This will increase the overall cost of your loan because the total interest that accrues will be higher.

Alternatives to Refinancing a Personal Loan

If you want to adjust your personal loan, refinancing isn’t the only option.

Especially if you’re looking to refinance because you’re struggling to make the minimum payment amount each month, start by reaching out to your current lender. You can sometimes negotiate with your lender to get a lower monthly payment or to ask for more time to make your payments.

You could also consider transferring your loan to a balance transfer credit card. These credit cards usually come with an introductory offer where you pay no interest on the balance for 12 to 18 months. However, there’s usually an upfront balance transfer fee.

If you plan to pay off your loan in the next year or so, a balance transfer credit card with 0% APR can be a good alternative to personal loan refinancing that will save you a lot of money in interest. Just make sure to fully pay off the loan before the promotional rate expires, or else you’ll be left paying massive credit card interest rates.


FAQs

How Soon Can You Refinance a Personal Loan?

There are typically no restrictions on how soon you can refinance a personal loan. You can refinance as soon as you’d like.

However, refinancing incurs costs in the form of prepayment penalties and loan origination fees, so you shouldn’t refinance unless it helps you achieve your financial goals. If you’re wanting to refinance within a month or two of getting a loan, you should think hard about why you’re refinancing.

How Many Times Can You Refinance a Personal Loan?

There’s no real limit to how frequently you can refinance a personal loan. Each time you refinance, you replace an old loan with a new one.

The limit is based solely on whether lenders will keep approving you for new loans. Each time you apply for a loan, it reduces your credit score by a few points, so eventually you’ll struggle to find a willing lender and your new loans will grow more expensive.

Realistically, you likely wouldn’t want to refinance a personal loan more than once or twice.

Why Would I Want to Refinance a Personal Loan?

The main reasons to refinance a personal loan are to save money, either on a monthly basis or in the long run.

Refinancing your loan to have a longer term will save you money on a monthly basis by reducing your monthly payment. However, this comes at the cost of higher interest charges over the life of the loan.

Refinancing to a lower interest rate can save you money in the long run by reducing the total interest that accrues. It can also help you reduce your monthly payment.


Final Word

If you have a personal loan, refinancing can help you reduce the overall cost of your loan or lower your monthly payment. In today’s low-rate environment, refinancing can save you a lot of money, especially if your credit has improved since you first got your loan.

There are many reasons to refinance. The best refinancing loan options will help you achieve multiple goals, like consolidating multiple loans and lowering your monthly payments. Look for opportunities to refinance in a way that will help you achieve your personal finance goals.

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TJ is a Boston-based writer who focuses on credit cards, credit, and bank accounts. When he's not writing about all things personal finance, he enjoys cooking, esports, soccer, hockey, and games of the video and board varieties.

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