To refinance a personal loan, get your old loan’s payoff quote, then prequalify with several lenders using soft credit checks, which don’t affect your score. Apply only to the lender whose offer costs least in total. Keep paying the old loan until it shows a zero balance, since the payoff can take days to arrive.
Each step is simple. The costly mistakes happen between them: applying before you know what it takes to close the old loan, choosing the offer with the smallest payment, and stopping payments before the new lender’s money arrives.
To close the old loan, you need its payoff amount, not the balance on your statement. The payoff amount includes the interest owed through a specific date, and the quote is good only through that date. If the date passes before the new loan pays off the old one, ask for a fresh quote.
The money the new lender sends has to cover that amount. Many lenders take an origination fee, a one-time charge for making the loan, out of that money. With a 5% fee taken out, covering an $8,000 payoff means borrowing about $8,420.
Take the steps in this order.
- Ask your current lender for a payoff quote and its good-through date, and check your loan agreement for a prepayment penalty, a fee for paying off early.
- Prequalify with three or more lenders to see the rates they’d likely offer.
- Compare the offers by APR, the yearly rate that counts fees along with interest, and by the total you’d repay. Between two offers at the same APR, the longer term has the lower payment and the higher total.
- Submit one full application to the lender whose offer costs least in total. That application brings your only hard inquiry, which can lower your score a few points.
- Choose direct payment to your old lender if the new lender offers it.
- Keep making the old loan’s payments until its balance reads zero.
When the payoff reaches the old lender, check the old loan’s balance. If it arrived after the good-through date, you still owe a few days of interest, and paying it brings the balance to zero. If a regular payment landed alongside it, you overpaid, and the old lender owes you a refund. Then ask for a letter confirming the loan is paid in full.
If you’re shopping for a new loan, compare the best personal loan companies.
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