How to Refinance a Personal Loan

When you refinance a personal loan, you pay it off with another loan. Ideally, your new loan has a lower rate.

Steve NicastroMay 4, 2020
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When you refinance a personal loan, you replace an existing loan with a new one. This strategy can save you money if you qualify for a lower interest rate on the new loan. There also may be other situations where it makes sense to refinance a personal loan.

How to refinance a personal loan

Here are five steps to refinancing your personal loan.

  1. Pre-qualify for a new personal loan. Pre-qualify with multiple lenders to see the rate and terms you can get on a new loan and how they compare with the terms on your existing loan.

  2. Consider refinancing costs. Add up the new loan’s interest and fees and compare them to your existing loan to determine whether refinancing will save you money in the long-term.

  3. Use the new loan to pay off your current loan. Most lenders transfer funds to your bank account instead of directly paying off your first loan. It’s up to you to pay off the existing loan.

  4. Confirm the old loan is closed. Check your account to ensure there’s no balance on your first loan to avoid additional fees.

  5. Start making payments toward the new loan. Most lenders allow you to set up automatic, recurring payments from a checking account.

» MORE: Personal loans with the best interest rates

When refinancing is a good idea

Your credit has improved. Borrowers with good (690 to 719) or excellent credit (720 and higher) typically receive lower rates on personal loans. If you’ve kept up with on-time payments toward your first loan and your credit score has grown, then you may receive a lower rate on a new loan and refinancing could save you money.

You need lower payments. Refinancing can extend your repayment term, lowering your monthly payment. This can boost your cash flow, which is the total amount of money left over each month after all expenses are paid. You can then use the extra cash to repay higher-cost debts or start an emergency fund.

However, an extended term means you’ll pay more in total interest and be in debt for a longer period of time.

» MORE: How personal loan deferment works

You want to pay off the loan faster. If higher monthly payments fit into your budget, you can refinance to a shorter-term loan, reducing your total interest costs and allowing you to pay off the debt sooner.

This strategy works best if your existing loan carries a long repayment term and you can get a better rate, says Sahil Vakil, president of MYRA Capital LLC, a financial planning firm based in New York.

To switch from a variable to fixed rate. If your personal loan carries a variable rate — meaning its rate and your payments may rise over time based on market rates — then refinancing to a fixed rate will result in consistent monthly payments and provide more certainty in your budget.

Refinance personal loan calculator

Use this calculator to determine whether or not refinancing your personal loan will save you money.

Lenders that allow refinancing

Some lenders allow you to refinance loans obtained from other lenders, but not their own loans. With other lenders you can use the proceeds of a personal loan for any reason, including refinancing.

Best Egg allows you to take a loan to pay off a loan from a different lender, but you can’t refinance an existing Best Egg loan. The lender offers loans from $2,000 to $35,000, and charges an origination fee from 0.99% to 5.99% on the amount borrowed.

LightStream doesn't allow borrowers to refinance existing LightStream loans, but it does refinance loans from other lenders. The company offers loans from $5,000 to $100,000, with no origination fees.

Pros and cons of refinancing

Pros

Lower APR: If your credit, income or debt-to-income ratio have improved since you took out the original loan, you may be able to get a lower APR on the new loan.

Shorter repayment period: If you can afford a higher monthly payment, refinancing to a shorter-term loan will reduce overall interest costs and get you out of debt faster.

Cons

A longer term can mean more interest: Unless you receive a lower APR on a new loan, refinancing to a longer repayment period increases your total interest costs and leaves you in debt longer.

Origination fees: Some lenders charge origination fees for taking out a new loan, ranging from 0% to 8% of the loan amount, which could outweigh any savings from refinancing.

Prepayment penalty: Prepayment penalties are uncommon among online lenders, but some lenders may charge this fee if you repay a loan early.

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