If you already have a personal loan, you may eventually wonder whether refinancing could make your debt easier or less expensive to manage. Personal loan refinancing involves taking out a new loan to repay an existing personal loan, usually with the goal of changing the interest rate, monthly payment, repayment term, or another part of the borrowing arrangement.
Refinancing can be useful in some situations, but it is not automatically beneficial for every borrower. A new loan can involve interest, fees, and a new repayment schedule. Before refinancing, it is important to compare the new loan with your existing loan and understand the total cost.
What Does It Mean to Refinance a Personal Loan?
Refinancing a personal loan generally means replacing your existing loan with a new loan.
The new loan is used to pay off the remaining balance on the original loan. After that, you make payments on the new loan according to its terms.
For example, suppose you originally borrowed $15,000 and still owe $9,000. You may apply for a new personal loan for approximately the amount needed to pay off the existing balance.
If approved, the new loan could have a different interest rate, repayment term, or monthly payment.
The exact refinancing process varies between lenders. Some lenders may offer personal loan refinancing directly, while others may allow borrowers to use a new personal loan to repay an existing debt.
Why Do Borrowers Refinance Personal Loans?
There are several reasons someone might consider refinancing.
One common reason is obtaining a lower interest rate. If your credit profile or financial circumstances have improved since you took out the original loan, you may potentially qualify for different loan terms.
Another reason is reducing the monthly payment. A longer repayment term may lower the required monthly payment, although it could increase the total interest paid.
Borrowers may also refinance to change their repayment schedule or simplify their finances.
Before making a decision, consider what you are actually trying to achieve. A lower monthly payment is not necessarily the same as a lower overall borrowing cost.
Can You Refinance a Personal Loan With a Lower Interest Rate?
Potentially, yes.
Whether you qualify for a lower rate depends on factors such as your credit history, income, existing debts, lender requirements, loan amount, and current market conditions.
If your financial profile has improved since you took out your original loan, refinancing may give you access to a different rate.
However, you should compare the new loan’s APR rather than looking only at the advertised interest rate.
Fees can also affect the actual cost of refinancing.
For a better understanding of the costs associated with borrowing, see our guide to the true cost of a personal loan.
Can Refinancing Lower Your Monthly Payment?
Refinancing may lower your monthly payment, but the result depends on the new loan amount, interest rate, and repayment term.
For example, extending a loan from three years to five years can spread the remaining balance over a longer period. This may reduce the monthly payment.
However, you may make payments for an additional two years and potentially pay more interest overall.
Therefore, borrowers should compare both:
- New monthly payment
- Total amount repaid
A lower payment can improve monthly cash flow, but it does not automatically mean the refinancing option is cheaper.
What Are the Potential Benefits of Refinancing?
Personal loan refinancing can offer several potential benefits depending on the borrower’s circumstances.
Lower Interest Rate
If you qualify for a lower rate, refinancing may reduce the interest charged on the remaining balance.
Lower Monthly Payment
A different interest rate or longer repayment term may reduce the required monthly payment.
Different Repayment Term
You may be able to choose a repayment period that better matches your current financial situation.
Improved Cash Flow
A lower required payment could leave more money available for other monthly expenses.
Simplifying Debt
In some situations, refinancing may be used as part of a broader debt-management strategy.
However, each potential benefit should be compared with the costs and conditions of the new loan.
What Are the Potential Drawbacks?
Refinancing also has potential disadvantages.
One important concern is fees. A new loan may have an origination fee or other costs. If the fees are high enough, they could reduce or eliminate the benefit of a lower interest rate.
Another issue is extending the repayment period. A longer term may lower your monthly payment while increasing the total interest paid.
You should also consider whether your existing loan has any prepayment conditions or fees.
Read both the existing loan agreement and the new loan offer carefully before refinancing.
How Does Refinancing Affect Your Credit?
Applying for a new personal loan can involve a credit inquiry. Depending on the lender and application process, this may result in a hard inquiry on your credit report.
Opening a new loan can also change information on your credit reports, including the number of accounts and outstanding balances.
The exact effect on your credit score varies by individual circumstances and scoring model.
If you are considering refinancing, avoid assuming that a new loan will automatically improve or damage your credit. Instead, consider how the new account fits into your overall credit profile and whether you can consistently make the new payments.
When Might Refinancing Make Sense?
Refinancing may be worth considering when the new loan provides terms that better fit your current financial situation.
For example, you might compare refinancing after your credit profile has improved or when you find a loan with a meaningfully lower APR and manageable fees.
It may also be worth considering if your current monthly payment has become difficult to manage and a new repayment term could provide additional flexibility.
However, the decision should be based on the complete cost of the new loan rather than one feature.
When Might Refinancing Not Be Helpful?
Refinancing may not provide much value if the new interest rate is similar to or higher than your current rate and the new loan includes significant fees.
It may also be less useful if you extend the repayment term substantially and end up paying considerably more interest.
Another consideration is how much remains on your existing loan. If you are already close to paying off the loan, the potential savings from refinancing may be limited.
Calculate the remaining interest on your current loan and compare it with the total cost of the proposed replacement loan.
How Do You Compare a Personal Loan Refinance Offer?
Start by collecting the important details from both loans.
Compare:
- Remaining balance
- Current interest rate
- Current APR
- Remaining repayment period
- Current monthly payment
- New interest rate
- New APR
- New monthly payment
- New repayment term
- Origination fees
- Other charges
- Total amount to be repaid
This comparison can help you understand whether the new loan actually improves your financial position.
For additional information about how loan payments work, you can also review our guide to personal loan monthly payments.
Does Refinancing Pay Off Your Old Personal Loan?
In a typical refinancing arrangement, the new loan is used to repay the outstanding balance on the original loan.
Once the old loan is paid off, you generally no longer make payments to that original lender. Instead, your repayment obligation moves to the new loan.
However, borrowers should confirm that the original loan has actually been paid in full and check whether any final interest or fees remain.
Keep documentation showing the payoff and closing of the old account for your records.
What Should You Check Before Refinancing?
Before applying, review your current loan agreement and determine exactly how much you still owe.
Then research potential refinancing offers and compare their APRs, fees, repayment terms, and monthly payments.
You should also consider whether your income and expenses can comfortably support the new payment.
If the purpose of refinancing is to reduce your monthly expenses, make sure the new payment actually provides enough flexibility to justify the change.
Do not focus only on the advertised interest rate. A loan with a slightly lower rate but substantial fees may not provide meaningful savings.
Final Thoughts
Yes, a personal loan can potentially be refinanced, but whether refinancing is useful depends on the terms of both the existing and new loans.
A lower interest rate may reduce borrowing costs, while a longer repayment term may lower the monthly payment. However, fees and extended repayment periods can increase the overall cost.
Before refinancing, compare your remaining balance and current loan terms with the complete terms of the new loan. Look at the APR, monthly payment, repayment period, fees, and total amount you will repay.
The goal should be to understand the full financial effect of replacing your existing loan rather than focusing on a single number.
Frequently Asked Questions
Can you refinance a personal loan?
Yes, depending on the lender and your eligibility. Refinancing generally involves using a new loan to pay off the remaining balance of an existing personal loan.
Is it possible to refinance a personal loan with bad credit?
It may be possible, but eligibility and loan terms depend on the lender and your overall financial profile. Borrowers with weaker credit may receive higher rates or fewer options.
Does refinancing a personal loan lower your interest rate?
It can if you qualify for a new loan with a lower rate. However, fees and other loan terms should also be considered when calculating potential savings.
Does refinancing reduce your monthly payment?
It may. A lower interest rate or longer repayment term can reduce the required monthly payment. However, a longer term may increase the total interest paid.
Does refinancing a personal loan hurt your credit?
Applying for a new loan may involve a hard credit inquiry, and opening or closing accounts can affect your credit profile. The overall effect varies by borrower and credit scoring model.
Should you refinance a personal loan?
Compare your existing loan with the complete terms of the new loan. Consider the interest rate, APR, fees, monthly payment, repayment term, and total repayment amount before deciding.
Can you refinance a personal loan with the same lender?
Some lenders may offer refinancing options, while others may not. Contact your lender or review its current loan products to determine whether refinancing is available.
