Refinancing a personal loan can help you save money on interest or lower your monthly payments. But if you don’t qualify for a lower rate than your current loan has, refinancing could cost you more, especially if you extend the loan’s term length.
Here’s how to refinance a personal loan and when it’s a good idea.
» MORE: Compare the best personal loans
How refinancing a personal loan works
When you refinance a personal loan, you replace your existing loan with a new one, either from your current lender or a different one. You use the funds from the new loan to pay off the existing loan, and then make monthly payments toward the new one.
Refinancing works similarly to debt consolidation except you use the new loan to pay off one existing personal loan rather than using it to pay off multiple debts.
Refinancing makes the most sense when the interest rate or monthly payments on the new loan are lower than your current loan. You may be able to lock in a lower rate if your credit score has improved since you took out your original personal loan.
Loan refinancing example
Let’s say you have an $18,000 balance and five years remaining on a loan with a 22% annual percentage rate (APR), and your monthly payment is $500. Perhaps your credit score has gone up since you applied for that loan, and now you qualify for a new loan with a 12% APR.
If you refinance the current balance over a five-year term, you would save about $5,476 over the life of the loan and shave about $100 off your monthly payment.
Find out if refinancing your personal loan can save you money by comparing your current loan with the one you’re considering. Use this personal loan refinance calculator to estimate your potential savings.
How to refinance a personal loan
- Check current personal loan rates. Personal loan rates don’t change often, and when they do, they don’t typically change by much. Still, it’s a good idea to check whether current rates are lower or higher than when you first got your loan. If average personal loan rates are higher than when you first borrowed, you may not save money by refinancing.
- Request your loan payoff amount. To ensure that your new loan is large enough to pay off the old one, request a 10-day payoff letter from your current lender. This letter will show the full amount needed to pay off your loan, plus any interest and fees that will accrue within the next 10 days. Many lenders require this document if you’re getting a new loan to refinance an existing one.
- Pre-qualify for a new personal loan. Pre-qualifying doesn’t affect your credit score, so you can pre-qualify with multiple lenders to see the rates, terms and monthly payments you can get on a new loan.
- Consider refinancing costs. Compare the new loan’s APR and estimated monthly payments to your existing loan to determine whether refinancing will save you money or lower your payments. Some lenders charge an origination fee, which often reduces the loan amount by up to 10%, so be sure the new loan will be large enough to pay off the old one.
- Submit a new loan application. Complete a formal application with the new lender and provide any necessary documents to verify your income and other details. The lender will run a hard credit check at this stage, which will cause your credit score to dip a few points.
- Use the new loan to pay off your existing loan. Some lenders transfer funds to your bank account, while others may directly pay off your first loan. Though it usually only takes a few days to get a new personal loan, be sure you’re making on-time payments toward your existing loan until you receive the new loan funds and have paid your old one in full.
- Start making payments toward the new loan. Most lenders let you set up automatic, recurring payments from a checking account. This can help you avoid missing payments and encountering late fees.
Lenders that let you refinance a personal loan
Some lenders allow you to refinance loans from other lenders, but not their own loans. Here are the refinancing policies of eight popular lenders.
Lender | Refinances loans | Est. APR |
|---|---|---|
From Best Egg or another lender. | 6.99% - 35.99%. | |
From Discover or another lender. | 7.99% - 24.99%. | |
Does not allow personal loan refinancing. | 7.49% - 24.94%. | |
Only from another lender. | 7.49% - 24.94%. | |
From Rocket Loans or another lender. | 7.99% - 29.99%. | |
From SoFi or another lender. | 6.99% - 35.49%. | |
From Upgrade or another lender. | 7.74% - 35.99%. | |
Only from another lender. | 9.24% - 24.99%. |
When to refinance a personal loan
Your credit has improved or your debt-to-income ratio is lower. You may qualify for a lower rate on a new loan if your credit score has gone up or your debt-to-income ratio has decreased. If you can lower your interest rate, refinancing could save you money.
You need lower payments. If you refinance and get a new loan with a longer repayment term, you can lower your monthly payment. This could be helpful if you need more room in your budget for other financial obligations or to build savings. Just note: Extending your loan term could result in higher overall interest costs.
You want to pay off the loan faster. If higher monthly payments fit into your budget, you can refinance to a shorter-term loan to reduce your total interest costs and clear the debt sooner. This strategy works best if your existing loan carries a long repayment term and you can get a better rate without paying an origination fee.
If you can’t get a better rate, you can pay off your loan faster by making extra payments without refinancing. Most major lenders don’t charge a prepayment penalty for paying your loan off early, but check your loan agreement to be sure.
When to avoid refinancing a personal loan
You can’t get a lower rate. It can be difficult to qualify for a better rate on a new loan if your credit score hasn’t improved — or if your debt-to-income ratio has increased — since you got your current loan. Paying off other debts and making on-time payments can help build your score back up. However, if lenders are now charging higher interest rates due to economic changes, it may be difficult to find a better rate, even if your credit has improved.
The origination fee cancels out what you’d save in interest. If the new loan comes with an origination fee, weigh the amount of money you’d save by refinancing against the cost of the fee.
Frequently Asked Questions
Can you refinance a personal loan if you have bad credit?
You can refinance a personal loan with bad credit (a score of 629 or lower), but you may not qualify for a lower rate than you currently have. However, you potentially could refinance your loan to extend your repayment term — even if you can’t score a lower rate on the new loan. You might end up paying less per month, but you’ll likely pay more interest over the life of the loan.
If your credit score is low, you may have a better chance of qualifying for a new loan if you get a secured personal loan or apply with a co-applicant who has a strong credit history. Credit unions and online lenders may be more likely to approve your loan application than traditional banks.
Does refinancing hurt your credit score?
Refinancing can cause a small drop in your credit score when the lender performs a hard credit check, but the effect is temporary. Hard inquiries usually affect credit scores for about a year. As long as you make your full monthly payments on time, refinancing shouldn't have a long-term negative effect on your credit score.
How soon can you refinance a personal loan?
You may be able to refinance your personal loan shortly after you start making payments, though some lenders may have their own restrictions. But taking time to boost your credit score will give you a better chance of refinancing at a lower rate.
