How And When You Can Refinance A Personal Loan
Hanna Kielar6-Minute Read
UPDATED: April 30, 2023
Refinancing a personal loan under the right circumstances can save you time and money, and help you pay your debt faster. You could get a lower interest rate or extend your repayment period, thereby lowering your monthly payment. Refinancing a personal loan has some drawbacks, though, and it may not be the right move in every situation.
Let’s learn how you can refinance a personal loan and when the time is right for it.
Can You Refinance A Personal Loan?
If you believe a refinance makes sense for your situation, you can refinance into a new loan with preferred rates and terms.
When you refinance a personal loan, you replace your original loan with a new loan and have the potential to save money on interest or secure more favorable loan terms. You can apply for a refinance through your current lender – subject to their restrictions – or a new loan. If approved, a lender will provide you enough money to pay off your active personal loan, then you would repay the lender in accordance with the new loan’s terms.
Apply For A Personal Loan.
Best Reasons To Refinance A Personal Loan
If your credit score has improved significantly since you took out the original loan, or your budget is under strain with your monthly payment amount, refinancing your personal loan may be a great option.
Advantages of a personal loan refinance include:
- You could get a lower interest rate. A lower interest rate can help you save money over the loan lifespan because you’ll pay less in interest (assuming you keep the same repayment term). If you continue to pay the same amount each month, you can get rid of your loan faster since more of your payment will go to the principal. Or, you can simply enjoy a lower monthly payment due to the reduced interest rate.
- It can lower your monthly payments. If money is a little tight, or you want to free up some cash for another purpose, extending your repayment to a longer-term loan can definitely help you lower your monthly payments. Spreading out your loan over more months means your monthly payment amount will drop as you work to balance your budget. Be aware, though, that you may pay more in interest going this route, because you’ll carry the debt over a longer period of time.
- You might pay your loan off faster. Conversely, if you’re in a good financial place, you can refinance your personal loan to a shorter repayment period. That way, you’ll knock out your debt faster and may save money on interest since you’re making payments for a shorter period of time.
- You can move from a variable interest rate to a fixed interest rate. If you currently have a variable interest rate on your personal loan, it can be difficult to budget your monthly payments with the potential for constant market fluctuations. By refinancing your personal loan to a fixed interest rate, your monthly payments will be predictable until you pay the loan off.
- It could help you avoid a balloon payment. Some personal loans have a balloon payment, requiring you to make a substantially larger payment than your normal monthly payments once you reach the end of your repayment period. Refinancing your loan can help you avoid having to make this large payment.
Drawbacks To A Personal Loan Refinance
Potential disadvantages to refinancing a personal loan likewise exist. Consider these drawbacks to a personal loan refinance:
- You could pay more in interest. You may lower your monthly payment by extending your loan’s term, but that extra time will incur more interest over your longer repayment period. It’s possible you’ll ultimately end up paying more than you would with a shorter term.
- You may owe additional fees. Often, personal loans charge an origination fee as a percentage of the loan amount. If the origination fee is high enough, it could offset any benefits from a lower interest rate or more favorable loan terms. In addition, if your active loan charges a prepayment penalty, you’ll need to factor that into your decision.
- Refinancing can affect your credit. A personal loan refinance can affect your credit score in various ways, which we’ll look at in more detail momentarily. One of the most immediate ways your credit is affected is through a hard inquiry.
- You might not qualify for a lower rate. Unless your credit score has improved since you took out your original loan, you could end up with the same interest rate or even a higher one. Since the main goal when refinancing is to save money, it would make more sense to wait until you’ve improved your credit before refinancing a personal loan.
How Soon Can You Refinance A Personal Loan?
Qualifying borrowers are typically able to refinance their personal loan as soon as they begin making payments on it. You can also refinance a personal loan as often as you’d like over its lifetime.
To qualify for a refinance, you’ll need to work with your lender (whether it’s your existing one or a different one) to determine what guidelines they have in place for eligible borrowers. In general, these requirements will be maintaining a healthy credit score and having enough money to cover the origination fees on the new loan.
How To Refinance A Personal Loan
You can refinance your personal loan by following these steps:
1. Determine The Amount Of Money Needed
The first step to getting your new personal loan is checking how much money you still owe on your active loan. You’ll need to borrow at least that much (plus any fees for the new loan) to complete your refinancing. Knowing this information and whether your lender charges any prepayment penalties for paying the loan off early will be helpful when shopping for the best rate.
2. Check Your Credit Score And Report
The next step in the refinancing process is to review your credit score and credit report. You can request your free report from the three main credit bureaus (Equifax®, Experian™ and TransUnion®) on an annual basis. This report is important to understand, because your credit health will be used to determine whether you qualify for a better rate or loan term.
Ideally, you’re in a much better financial position than you were when you took out your original loan. An up-to-date record of creditworthiness can help you get the best deal available. If your credit score won’t help you secure a better rate, you may want to wait on refinancing and focus on strengthening your credit score.
3. Prequalify For A New Personal Loan
Next, prequalify for your new personal loan. Prequalifying gives you an idea of how much you can borrow from your lender as well as your potential interest rate and other loan terms. This normally involves a soft credit check, which won’t impact your credit score.
4. Shop Around For The Best Rates And Terms
Shop around until you find the lender with the best personal loan option for your situation. Before officially applying for your new personal loan, you should feel confident that it makes financial sense. To start your search, use the Rocket Loans℠ Simple Calculator to determine your monthly payments on a new personal loan.
Before seeking out a new lender, consider contacting your current lender to see if they may be willing to offer you a refinance of your existing loan with a revised rate and terms. The lender may value your existing relationship and the opportunity to continue working with you.
5. Apply For Your New Personal Loan
Once you’ve committed to refinancing, officially apply for your new personal loan by providing the lender with any required paperwork or verification. If you’re approved after completing the underwriting process, your new lender may offer to work with your old lender on your behalf to pay off your existing loan. Otherwise, your new lender will disburse the funds directly to you so you can personally make the final payment on your active loan.
Be sure to read through your agreement, including the fine print, before signing. This way, you can make sure you’re satisfied with the terms and conditions of your new loan.
6. Responsibly Manage Your New Personal Loan
Now that you have your new personal loan, all you need to do is make timely payments on it until that obligation is complete. Don’t forget: Borrowers are allowed to pay more than the minimum required each month without penalty. This will allow you to pay off the loan faster and help save on interest.
Does Refinancing A Personal Loan Hurt Your Credit?
Refinancing your personal loan can have a slight impact on your credit score. That’s because your new lender will do a hard credit pull before deciding to issue you the loan.
In addition, depending on the credit scoring model being used, closing your old personal loan could reduce your average age of credit, which may cause your credit score to initially drop. Don’t worry too much, though. By making timely payments on your new personal loan as well as other debt like credit card purchases, your score should quickly recover from these small dings.
Do keep in mind that a hard inquiry of your credit that happens at the same time as moving or buying a car could cause issues. That’s because landlords and car dealers run your credit report prior to making a decision on your loan offer. If they find a ding in your credit score, it could raise concerns for them.
If your credit score has vastly improved, or if your budget is feeling the pinch with your active monthly payment, refinancing your personal loan can make sense. Before taking any action, you should first compare personal loan options and be sure that refinancing is actually going to make your financial situation better.
If the time feels right to refinance, start the process today with Rocket Loans.
Ready To Improve Your Financial Life?
Viewing 1 - 3 of 3
How To Get Low-Interest Personal Loans
Low-interest personal loans can be useful financial tools, but certain factors can determine your rate. See how you can get a personal loan with low interest.
Should You Get A Personal Loan? What To Know Before You Apply
A personal loan may be right for a lot of people, but ask yourself, “Is a personal loan right for me?” Learn how to know whether you should get a personal loan.