How and When Should You Refinance a Personal Loan?

It's important to understand the ins and outs of refinancing a personal loan before completing the financial transaction. If you're considering refinancing your loan, make sure to factor the following information into your decision.

What Does Refinancing Mean?

Whether you use the same lender as the original loan or a different lender, refinancing involves paying off the old debt with the proceeds from the new loan. With a personal loan refinance, some lenders may issue the payment directly to the existing lender(s) and some may issue the funds to you with the understanding that you will pay off the existing loan with those proceeds. There are many types of refinance loans, such as:

  • Cash-out personal loan refinance allows you to borrow more than the balance of your existing loan and receive the additional funds in cash.
  • Interest rate refinance is when you refinance one personal loan for a new loan with a lower interest rate, helping to save money on interest payments.
  • Shorter-term personal loan refinance reduces your existing loan with a shorter term on a new loan, which can help you pay the loan faster and reduce the amount of interest paid over the life of the loan.
  • Longer loan term refinance stretches the term of your loan, which helps lower your monthly payment. However, this option tends to increase the total cost of the loan.
  • Consolidation refinance allows you to consolidate several credit cards, lines of credit, or personal loans into a single loan with — ideally — a lower interest rate.

When Should I Refinance a Personal Loan?

When it comes to refinancing your loan, timing is paramount. It may be an opportune time to refinance your loan if it can help you save money or improve your financial position. Examples of when it may make sense to refinance your personal loans are explained below:

  1. Your credit score has improved. If your credit score has improved, you may qualify for a lower interest rate than when you took out the loan. This can be a great reason to refinance.
  2. Interest rates have decreased. If the national interest rate average has decreased, you may qualify for a lower interest rate.
  3. You want to switch your rate type. Variable interest rate loans can make it difficult to plan monthly payments. Switching to a fixed rate can offer you more consistent payments and help you save money over the life of the loan.
  4. You want lower monthly payments. If your financial situation has changed, and you need to lower your monthly payments, you may be able to refinance for a longer repayment term to lower your monthly payments.

Before you refinance your loan, speak to the current lender to ensure it's an option. Every lender is different and has different policies regarding refinancing. For example, if a lender has an early payment penalty, it may make loan refinancing cost prohibitive.

Advantages of Refinancing a Personal Loan

Refinancing your personal loan can open the door to several benefits. While everyone's situation is different, some of the most common perks of refinancing a personal loan are:

  • Gain access to cash. Cash-out refinances may offer you access to cash for debt consolidation or other needs.
  • Reduce your interest rate. Refinancing may help you get a lower interest rate on your loan.
  • Lower your monthly payments. If you qualify for a lower interest rate or choose a longer term, refinancing can reduce monthly payments.
  • Streamline your finances and consolidate several payments into one. If you refinance and consolidate multiple loans, you can simplify your finances.

Disadvantages of Refinancing a Personal Loan

Just as there are benefits to refinancing a personal loan, there are also potential disadvantages. Make sure to consider the following possible drawbacks.

  • Prepayment penalties. Some personal loans include prepayment penalties, which are fees for paying the loan back earlier than scheduled. Make sure to review your loan agreement or speak to your lender to understand if your personal loan has prepayment penalties.
  • Additional lending fees or higher interest rates. In addition to prepayment penalties, most lenders charge fees for issuing a loan, such as origination fees, application fees, processing fees, document fees, legal fees, etc. You may be subject to paying these fees when you refinance. You also want to think carefully about refinancing if the refinance loan carries a higher interest rate than your existing loan.
  • Possible credit score implications. Applying for a new loan often leads to a hard inquiry on your credit report. Most hard inquiries decrease your credit score temporarily. Fortunately, they only affect your credit score for a year and are removed in two years.

Steps to Refinancing a Personal Loan

Once you understand the implications and have decided to refinance your personal loan, use the following steps to complete the process.

  1. Shop around at lenders and creditors. The first step is to search for possible lenders and creditors. While your current personal loan lender is a good place to start, you shouldn't limit your options.
  2. Compare offers. Review each lender's standard terms, fees, and stipulations to determine which offer best aligns to your financial needs.
  3. Apply for the loan. Now you've settled on whose offer you like the best, complete the personal loan application and provide any required documentation, such as personal information, paystubs, bank statements, etc. Afterward, your loan application will go through the lender's formal process, which includes underwriting and loan funding.
  4. Make payments on your new loan. The final step is to pay off your existing loan and begin making payments on your new loan. In many instances, the new lender will pay off the old loan. However, ensure you understand each lender's process as well as what's required from you.

Refinance Personal Loan FAQs

  1. Is Refinancing a Loan a Good Idea?
  2. Refinancing a loan can be a good idea in certain situations, but it may not always be the best option. Some reasons why someone might consider refinancing a loan include: lowering the interest rate, consolidating debt, and changing their loan terms.
  3. Could Refinancing Hurt My Credit Score?
  4. Refinancing a loan can have an impact on your credit score, but it may not necessarily hurt it. The exact effect on your credit score will depend on several factors, including your credit history and current credit score, the terms of the new loan, and the lender's underwriting guidelines


  1. Understand loan options | Consumer Financial Protection Bureau
  2. Average Personal Loan Interest Rates | Bankrate
  3. Prepayment Penalty: What It Is And How To Avoid One – Forbes Advisor
  4. Understanding Hard Inquiries on Your Credit Report | Equifax

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