You’ve heard of mortgage and student loan refinancing, but can you refinance a personal loan? The answer is yes. Many lenders offer personal loan refinancing options. So if you’re unhappy with your loan, you’re not stuck with it — you can try to find a new loan with better terms.
But just because you can refinance a personal loan, that doesn’t mean you should. In some situations, you’ll save more money by keeping your current personal loan. So if you’re thinking about refinancing, but aren’t sure if it’s the right financial move, this guide will help you decide.
Can You Refinance a Personal Loan?
First, what does it mean to refinance a personal loan? Refinancing involves taking out a new personal loan to pay off your existing one. Many lenders allow you to use their personal loans for any reason, including refinancing. So if you’re unhappy with your current interest rate or monthly payments, you can shop around for a new loan with better terms.
When is it a good idea to refinance a personal loan?
Refinancing your personal loan can be beneficial for the following reasons.
Your credit score has gone up
If your credit score has improved since you first took out the loan, you may qualify for a better rate. Lower interest rates could save you hundreds or even thousands of dollars in interest over the remainder of your term.
You want fixed payments
If you have a loan with a variable interest rate, you may also want to consider refinancing into a fixed rate for more predictability. Fixed rates won’t fluctuate, which guarantees the same monthly payment amount for the remainder of your term.
You need lower payments
Another good reason to refinance is to get a repayment term that better suits your financial situation. If you can’t manage your monthly payments, you may want to refinance into a longer-term loan with lower payment amounts. While it may cost more in interest overall, it is better than defaulting.
You’re unhappy with your lender’s service
If your lender has expensive fees, a clunky app, or terrible customer service, there are other companies to consider. Switching to another company can offer a more enjoyable experience and even save you money.
Pros and Cons of Refinancing a Personal Loan
Be sure to weigh the upsides and downsides when refinancing a personal loan.
Here is a list of the benefits and the drawbacks to consider.
The pros of refinancing your personal loan mean that you can:
- Save money on interest. If you get a loan with a lower interest rate or shorter term, you can save hundreds or even thousands of dollars in interest.
- Lower your fees. If you find a lender with fewer fees, you can cut down on your overall costs.
- Reduce your monthly payments. A personal loan with a longer term can reduce your monthly payment amount.
- Get better customer service. Switching to a new lender may improve the quality of customer care you receive.
The cons of refinancing a personal loan include the following:
- You may pay fees or prepayment penalties. Some lenders charge origination fees for taking out a new loan. You may also face prepayment penalties for paying off your existing loan early. If you get slapped with these fees, refinancing could actually cost you money, even if your new loan has a lower interest rate. That’s why it’s important to crunch the numbers and see if you’ll save money by refinancing overall.
- You may pay more interest. If you take out a new loan with a longer repayment period, you’ll probably pay more interest unless you can get a much lower interest rate.
- Refinancing could hurt your credit score. When you apply for personal loans, lenders perform a hard inquiry on your credit that stays on your report for up to two years. This can cause a small drop in your credit score. Also, paying off your current loan and closing the account could also ding your credit if it lowers the average age of your accounts.
Maximizing the advantages while minimizing the drawbacks will enable you to qualify for a new loan that offers you the best overall value.
How to Refinance a Personal Loan
Refinancing a personal loan requires some effort, but it can be well worth it for the potential savings. Follow these steps if you want to refinance.
Check your credit score
If you’re refinancing for a lower interest rate, check to make sure your credit score is better since you applied for your first loan. You probably won’t receive a better rate unless your credit score has increased. However, you still might if the market rates dropped significantly.
You should also check your credit report to make sure it’s accurate. Errors can lower your credit score, so if you find any, report them to the relevant credit bureau to get them corrected.
Compare rates and fees
Shop around for a personal loan and prequalify with a few different lenders to ensure you get the best rates. Compare the quotes you receive, taking into account both the interest rate of the loan and any associated fees.
You should also crunch the numbers to make sure refinancing is worth it. Are the interest rates you received low enough to save you money after fees and repayment penalties? If not, you may want to hold off on refinancing.
Apply for the loan you want
If the numbers make sense and refinancing will help you achieve your financial goals, apply for the new loan. Before you start your application, gather up the documents you’ll need, such as bank statements, pay stubs, and tax forms. Have these papers ready to make filling out your application easier.
The last step in the refinancing process is to pay off your current loan in full and close down the account. When you start making payments on the new loan, make sure you are never late. Regular and on-time payments can improve your credit score. Refinancing may cause your credit score to drop in the short-term. However, it can help your credit in the long-run if you pay regularly and on-time.
Frequently asked questions about refinancing personal loans
Does refinancing a personal loan hurt your credit?
Yes, refinancing a personal loan can temporarily hurt your credit. A hard inquiry on your credit report, which is necessary to qualify for a new loan, will cause your score to drop a few points. Additionally, when you pay off your old loan, it can lower the average age of your accounts, which also hurts your score.
However, these changes are temporary. As long as you keep up with your payments on your new loan and continue to work on your credit in other areas, your score will likely rebound.
Can I refinance a personal loan?
Yes, most people with personal loans can refinance them. However, whether you can or not will depend on if you can find another lender to approve your loan. If you can, then you will be able to use the new loan to pay off the old one. However, just because you can doesn’t mean you should. Before you refinance, check it offers significant benefits over your existing one.
Can you refinance a personal loan with the same bank?
It’s rare, but some lenders will allow you to refinance your existing loan with them. It doesn’t hurt to ask. If you are considering refinancing, check with your lender to see if they will give you a better offer.
How does refinancing a personal loan work?
Refinancing a personal loan is similar to refinancing a mortgage or other loan type. You find a new lender that offers you a better deal than you currently have. You then use the new loan to pay off your current lender. Keep in mind that refinancing could cost you money in prepayment penalties and origination fees.
Is refinancing a personal loan a good idea for me?
If you want to lower your interest rate, reduce your monthly payments, or switch to a new lender with better service, refinancing may be the right financial move. However, refinancing only makes sense if the benefits you get from your new loan justify the cost.
To see what options are available, start by comparing quotes from different lenders. Consider all the rates and terms to determine which ones may be beneficial for you. If you find a loan that provides good overall value and helps you achieve your financial goals, then refinancing your loan is a good idea. If not, you’ll be better off sticking with the one you currently have.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.