How to Refinance a Personal Loan

Written by Jordan BlansitReviewed by Nathan Brown, CFP®Updated: 3rd Aug 2022
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Refinancing your loan presents a chance to get a lower interest rate or give your budget some breathing room. If you’re struggling to make your payments or want to take advantage of your new and improved credit score, here’s what to know.

What is Personal Loan Refinancing?

Refinancing a personal loan involves buying out your current loan with a new one. Essentially, you apply for a new loan – either with the same lender or a third party – and use the funds to pay off your existing personal loan. Then, you make payments on your new loan at your new interest rate.

Generally, borrowers refinance loans to get a lower interest rate or extend their loan term. Extending your repayment period can lower your monthly payments, but it typically means paying more interest over the life of the loan. With a good credit score, you can refinance anytime – but it’s most beneficial if you can save a buck in the process.

Pros and Cons of Personal Loan Refinancing

Pros:

  • APR: Refinancing gives you a chance to qualify for a lower interest rate, which can lower your repayment amount
  • Shorter repayment terms: If you can afford larger monthly payments, a shorter term can reduce your overall interest
  • Extended repayment terms: If you’re in a bind and need financial relief, a longer repayment term can lower your monthly bill
  • Payment stability: Refinancing from a variable to fixed-interest loan can introduce financial stability into your budget

Cons:

  • Larger payments: If you opt for a shorter term, your monthly bill will go up (even though you’ll save long-term)
  • Higher long-term interest costs: Borrowers who opt for longer repayment terms usually pay more interest over time
  • Origination fees: Since refinancing involves taking out a new loan, you may find yourself on the hook for new loan fees
  • Prepayment penalties: Some lenders charge early payment penalties for closing out your loan earlier than planned
  • Credit score impacts: Refinancing involves applying for a new loan, which can generate a hard credit check that temporarily lowers your credit score

How to Refinance a Personal Loan (Step-by-Step)

#1. Figure Out How Much You Need

Before applying for any loan, it’s important to know how much you need. You can check your lender’s online portal or recent statements to determine how much you owe before quote shopping.

#2. Review Your Credit Score

Most lenders advertise their best rates. Unfortunately, you’re unlikely to qualify with a poor credit score or a derogatory mark on your credit report.

To ensure you don’t run into any nasty surprises, it’s a good idea to check your credit score before applying for a new loan.

You can also request a free copy of your credit report once annually at annualcreditreport.com to check for any discrepancies.

#3. Compare Lenders and Rates

Now it’s time to start shopping for the best rates. Generally, online lenders can offer the lowest rates, but don’t be afraid to shop around your community, too. Most importantly, check each prospective lenders’ fine print for any additional fees that may increase your loan costs.

>> More: See the Best Personal Loans

#4. Pre-Qualify Online (if Possible)

Many lenders let you prequalify for a personal loan with a soft credit check. This process doesn’t affect your credit score, but still allows a lender to show you your potential loan size, terms, and APR. You can use this information to compare loan offers on an even playing field without dinging your credit.

#5. Apply for the Loan

Once you’ve found a lender that meets your needs, the next step is submitting an application. You may have to provide several identifying and supporting documents in the process, such as your:

  • Government-issued ID
  • Social Security Number
  • Paystubs and/or statements
  • Tax documents

Note that application requirements vary by lender, so what’s required by one may not be necessary at another.

#6. Use New Personal Loan to Pay Off the Old Loan

Once you receive your loan funds, you can use the money to pay off your existing debt. Some lenders offer direct-to-lender payments for refinancing and debt consolidation loans. Others may deposit the money into your account, which you can then use to repay your loan yourself.

>> More: Review Common Personal Loan Requirements

#7. Make Sure Old Loan is Closed

After you’ve repaid your loan, be sure to confirm that it’s officially closed, lest you find yourself on the hook for surprise fees or penalties. It’s also a good idea to get confirmation in writing in case there’s a miscommunication along the way.

#8. Start Making Monthly Payments

Lastly, it’s time to start making your monthly payments. To ensure you never miss a billing period, you can set up automatic, recurring payments straight from your bank account to your lender.

Can You Refinance a Personal Loan?

Yes, you can refinance personal loans. If your original lender doesn’t offer a refinancing option, you can get a loan from another lender and use the funds to repay your debt. But be warned: some lenders charge hefty prepayment penalties to recoup some of the interest you would have paid over time.

Does Refinancing Hurt Your Credit Score?

Anytime you apply for a personal loan, including a refinance, lenders check your credit to ensure your eligibility and set appropriate rates and terms. Generally, a hard credit check stays on your credit report for up to two years, while the actual impact on your credit score fades in a few months. Beware lenders that advertise no credit checks, as they’re more likely to charge higher interest rates or have predatory lending practices.

Refinancing can also hurt your score when your original loan closes, especially if it’s relatively new. The impact of an account closure depends largely on when the loan was issued and whether it was in good standing.

Some credit scoring systems also view taking out new debts to pay off existing loans in a negative light. That said, you can usually recover your score simply by making on-time payments on your new loan.

Is it Good to Refinance a Personal Loan?

Refinancing your personal loan may come with added fees or slightly lower your credit score. But if the cost of refinancing comes out to you paying less overall than you would with your original loan, then financially, it can be a good idea.

On the other hand, if you’re in a bind and need to lower your monthly payments, refinancing can inject some breathing room into your budget. While you may pay more for your loan in total, avoiding a loan default is usually the right call.

As a rule, refinancing your loan makes sense if you:

  • Have improved your credit enough to qualify for a better interest rate
  • Want to refinance to a shorter-term
  • Need to lower your monthly payments
  • Want to switch from a variable to a fixed interest rate
  • Want to avoid an upcoming balloon payment
  • Will pay less over the life of the loan, even with new fees

Can I Renegotiate My Personal Loan?

An alternative to a full loan refinance is a loan modification. Some lenders permit existing borrowers to renegotiate their loan terms. Especially if you have a good track record with your current lender.

During the loan modification process, your lender may drop up a new contract with better rates or terms. Best of all, because they’re not issuing new credit, you may avoid a hard credit check or extra fees.

Bottom Line: Personal Loan Refinance

Refinancing your personal loan can save you a hefty chunk of change over time. But before dashing in willy-nilly, it’s important to do your research and ensure you’re making the savviest financial moves you can.

Whether you should refinance – and with which lender – depends on your financial situation and reason for refinancing. Always be sure to weigh the pros and cons carefully, and don’t forget to compare fees and penalties before selecting a new lender.

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Jordan Blansit
Jordan Blansit

Jordan Blansit is a Senior Writer, Researcher, & Product Analyst for SimpleMoneyLyfe with an inexplicable predilection for mortgages, investing, and personal finance. When she’s not click-clacketing from the comfort of her living room, you can find her in the California Redwoods or Oregon Siskiyous. Jordan’s areas of expertise are mortgages, personal loans, credit cards, and investing.