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Refinancing a personal loan can help you save money on interest or lower your monthly payments.
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 a $18,000 balance 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 $99.60 off your monthly payment.
» CALCULATE: See if refinancing saves you money
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.
- 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 seven popular lenders.
| Lender | Refinances loans | Est. APR |
|---|---|---|
| From Best Egg or another lender. | 6.99% - 35.99%. | |
| Only from other lenders. | 9.99% - 17.49% | |
| From Discover or another lender. | 7.99% - 24.99%. | |
| Only from other lenders. | 8.01% - 29.99%. | |
| From SoFi or another lender. | 7.74% - 35.49%. | |
| From Upgrade or another lender. | 7.74% - 35.99%. | |
| From U.S. Bank or another lender. | 8.74% - 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 that’s the case, 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 shorten the time it takes to pay off your loan 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?
If you have bad credit (a score under 600), you may not qualify for a new personal loan at a lower rate than your current loan. 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?
Any time you apply for a personal loan, including to refinance, you may see a small dip in your credit score when the lender performs a hard credit check. But 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?
While there may not be any restrictions keeping you from refinancing a personal loan shortly after getting one, giving yourself time to boost your credit score will give you a better chance of refinancing at a lower rate. Keep in mind that a lender’s hard credit check when you apply for a personal loan can cause your score to take a dip. Hard inquiries usually affect credit scores for about 12 months.
