How to Refinance a Personal Loan

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.

Here’s how to refinance a personal loan, plus when it’s a good idea and what to consider before you refinance.

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. Pre-qualifying doesn’t affect your credit score, and lets you compare new loan offers 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 lower your monthly payments or save you money in the long term.

3. Use the new loan to pay off your current loan. Some lenders transfer funds to your bank account, while others may directly pay off your first 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

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

These are some lenders with the best rates and their refinance policies.

Your credit has improved or you’ve paid off other debts. Borrowers with good or excellent credit (690 or higher FICO) and a low debt-to-income ratio typically receive the lowest personal loan rates. If you’ve consistently made loan payments on time 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 and leaving more room in your budget. You can use the extra cash to repay higher-cost debts or build your savings.

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.

 » MORE: Calculate your savings on a refinanced personal loan

Pros

Lower APR: If your credit, income or debt-to-income ratio has improved since you took out the original loan, you may be able to get a lower annual percentage rate 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. If you’re struggling to make your payments, your lender may let you temporarily pause, or defer, them.

Origination fees: Even if you refinance your loan with the same lender, you may have to pay an origination fee, which can be 1% to 10% of the loan amount. If you have this extra fee, make sure the amount you’ll get after the lender takes a cut is enough to fully refinance your loan.