How to refinance a personal loan

There are currently 23.5 million Americans with unsecured personal loans, according to TransUnion. Personal loans can be used for most expenses, and come with a monthly payment and repayment terms agreed upon by you and your lender. However, as you're paying off your debt, you may have the opportunity to refinance your personal loan with a potentially lower annual percentage rate (APR), longer repayment term, and/or a lower monthly payment.

It could be beneficial to refinance if your credit has improved since getting a loan, rates have fallen, your financial situation has changed, or you want to save money on total interest costs. Learn more about refinancing a personal loan, how it works, and when it can be a good idea.

How does a personal loan refinance work?

Refinancing replaces your current personal loan with a new one. Once you get a new personal loan and use the funds to pay off your outstanding balance, you'll start making payments on your new loan.

You can request to refinance through your current lender, or you can shop around with other online lenders, banks, and credit unions. To find the best deal, gather multiple quotes and compare them. You can typically prequalify for a personal loan online with just a soft credit check, which won't affect your credit. Note that if you formally apply for a loan, the lender will perform a hard credit check, which could temporarily ding your credit score.

Personal loan refinance example

Refinancing a personal loan can make sense if it gives you an advantage, such as lowering your monthly payment amount, APR, and/or overall interest costs. For example, suppose you took out a five-year, $10,000 personal loan with an 18.00% APR. Your monthly payment is $254, and it would cost you $5,236 in total interest.

If, after two years, your principal balance is paid down to $7,024 and your credit has improved, you may want to shop around for a new loan. Let's say you end up qualifying for a $7,000, three-year personal loan with an 8.00% APR, $219 monthly payment, and $897 in overall interest costs. By refinancing, you could save $35 per month and about $1,220 in interest over the three-year term.

In this case, refinancing could be a beneficial move. However, if the switch ends up costing you the same or more than you were paying before, you may be better off sticking with your existing loan.

It should be noted that the example above did not necessarily include upfront fees like origination fees, which can range up to 12% of the loan amount. Not every lender charges origination fees, but some do on certain loans. You want to be aware of any fees the new loan might have.

Compare personal loan refinance rates

Pros and cons of refinancing a personal loan

Pros

• Possibility of a lower APR: You may be able to secure a lower APR from another lender, depending on your credit profile. The average APR for a 24-month personal loan is 12.49%, according to the Federal Reserve.
• Could result in lower monthly payments: A lower APR or longer term can result in a lower monthly payment. But you may pay more in interest with a longer term.
• Switch to a fixed rate: If you're refinancing from a variable-rate loan - which fluctuates with the market - having a fixed rate can help you better budget for your payments.
• May be able to pay off your debt sooner: Depending on the loan, you may be able to refinance with a shorter term and pay the amount off sooner. This can result in higher monthly payments, however.

Cons

• Fees: Lenders may charge fees for new loans, such as an origination fee, which can reduce or possibly negate your savings.
• Possibility of increased costs: If you take out a loan with a longer term, it can potentially result in a higher cost to you.
• Can be difficult to qualify if you have bad credit: Not everyone will qualify for their ideal loan. The new lender will review your credit and income to determine if you qualify.
• Temporary credit score decline: Applying for a new loan and opening a new credit account can temporarily hurt your credit score.

Check Out: Average personal loan interest rates - and how to get a low APR

Why should you consider refinancing?

Refinancing can give you an opportunity to save money on an existing personal loan. If you qualify for a new loan that costs you less, it may be best to take advantage of the savings. However, run the numbers carefully and consider any fees that may reduce or cancel out your potential savings. You can use a loan calculator to help estimate the differences.

Refinancing can also be an alternative to defaulting on a loan. If you're having trouble making your loan payments and can't get a payment modification from your current lender, it may help to refinance and reduce your monthly payment amount. While extending your loan term can cost more in the long run, it may be worth it if it helps you avoid a default.

Additionally, if your financial situation changes, consider refinancing with a shorter term to pay off the loan sooner. If you have a higher income now, you may be able to afford the higher monthly payments and save on interest over the life of the loan.

How to refinance a personal loan

1. Check your credit: Check your credit reports to make sure they're in good shape. If you find any mistakes, report them to the appropriate credit bureau to get them fixed first so you can land the best possible rates and terms on your new loan. Reporting errors can often improve your credit score. You can get your credit reports for free at AnnualCreditReport.com.
2. Review your current personal loan: Check your current loan for your payoff amount, interest costs, APR, and how much of your term remains. This can help you prepare to shop around for a new lender.
3. Shop around: Next, shop around to find a better deal. Some lenders may be able to offer you different terms that can save you money.
4. Prequalify: You can prequalify with multiple lenders and get an estimate of potential rates and terms, and it won't affect your credit score. Prequalification is not an offer of credit, and your final rate may be different from the quote.
5. Compare the quotes: Once you've collected quotes from a handful of lenders, review them carefully. Take note of the APR, loan amount, terms, and total interest costs. See if any quotes beat your current loan.
6. Apply for the new loan: To move ahead with a loan quote, complete the lender's full application process. It often involves verifying your identity, residence, income, and credit. Once you formally apply, the lender will perform a hard credit pull, which will ding your score temporarily.
7. Get the funds: If approved, review and sign the loan contract. From there, the lender can send you the funds, often via a direct deposit to your bank account. You can usually expect to receive your money as soon as the same or next business day, though some lenders can take up to five business days or more.
8. Pay off your existing loan: Use the loan funds to pay off your existing personal loan. Contact your current lender and ask for the payoff amount. Then, pay it off in full. You can follow up and make sure that the lender reports the account as "paid in full" on your credit reports.
9. Make payments on the new loan: Make payments to your new lender according to the loan contract until the amount is paid off.

Learn More: What is personal loan pre-approval?

Refinancing personal loans FAQ

Can you renegotiate personal loan terms?

Some lenders can modify personal loan terms under certain circumstances. For example, if you're having financial problems, your lender may be willing to defer payments to the end of your loan term or extend your term to lower your monthly payment amount. It may also refinance your current loan, resulting in a new term, APR, and payment amount.

When is the best time to refinance?

It can be good to refinance if your credit has improved, you want lower monthly payments, or you want to pay off your loan sooner. By refinancing, you may be able to get a lower APR and reduce your borrowing costs.

How soon can you refinance a personal loan?

You can refinance a personal loan as soon as your payments begin and you get approved by another lender. But, keep in mind that opening several new credit accounts in a short period can hurt your credit score and raise red flags for future lenders. Additionally, if you're trying to refinance with the same lender, you may have to wait a certain amount of time before refinancing, among other qualifying criteria.

How many times can you refinance a personal loan?

If you want to refinance a personal loan with your existing lender, it may limit the number of times you can do so. For example, SoFi only allows you to refinance a personal loan once throughout the lifetime of your account. However, you can continue to refinance a loan with new lenders as long as you can continue to get approved.

Does refinancing a personal loan hurt your credit score?

When you apply for a new loan, the lender will process a hard credit inquiry that can hurt your credit score. The hard credit pull may cause a drop of five points or less for most people, according to FICO. The inquiry can stay on your credit report for two years and impacts your FICO score for up to one. A new loan can also lower your average credit account age, which can hurt your score. But consistent, on-time payments can help build your score over time.