When and 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.

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Updated Nov 20, 2024 · 1 min read

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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, when it’s a good idea and what to consider before you refinance.

» MORE: Best personal loan lenders

What does it mean to refinance a personal loan?

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 you make monthly payments toward the new one.

Refinancing makes the most sense when the interest rate or monthly payments are lower than your current loan.

» MORE: Compare personal loans rates

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 change by much, but it’s a good idea to check whether current rates are lower or higher than usual. 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-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 it lets you compare new loan offers against your existing loan.
Consider refinancing costs. Compare the new loan’s annual percentage rate and estimated monthly payments to your existing loan to determine whether refinancing will lower your payments or save you money in the long term. 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.
Confirm the old loan is closed. Check your account to ensure there’s no balance on your first loan to avoid additional fees.
Start making payments toward the new loan. Most lenders let you set up automatic, recurring payments from a checking account.

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. You want to see your old loan balance hit zero before you stop making payments on it to avoid accidentally missing one.

Though some lenders have a two-week or 30-day grace period for late payments, missing a payment could damage your credit score.

Lenders that can refinance a personal loan

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.

Here are six lenders’ refinancing policies.

Lender	Refinances loans	Est. APR
Upgrade	From Upgrade or another lender.	7.99% - 35.99% .
LightStream	Only from other lenders.	6.49% - 25.29% .
SoFi	Only from other lenders.	8.99% - 35.49% .
Discover	Only from other lenders.	7.99% - 24.99%.
Wells Fargo	From Wells Fargo or another lender.	7.49% - 23.74% .
Best Egg	From Best Egg or another lender.	6.99% - 35.99% .

When refinancing is a good idea

Your credit has improved or you’ve paid off other debts. Borrowers with good or excellent credit (690 or higher) 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 gone up, 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 for other financial obligations or to build savings. Just note that extending your loan term could result in you paying more in interest over time.

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.

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.

Should you refinance? Calculate your new personal loan payment

When you should wait to refinance 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 has decreased. Paying off other debts and making on-time payments can help build your score back up.

The origination fees are too high. A new loan may come with an origination fee that may offset any potential savings on interest. This fee is calculated into your APR, so if your new loan’s APR is lower than your old one — even with an origination fee — you’ll likely still save on interest.

Frequently Asked Questions

Does refinancing hurt your credit score?

Any time you apply for a personal loan, including to refinance, you may see a small, temporary dip in your credit score. As long as you make your full monthly payments on time, refinancing shouldn't have a long-term negative effect on your credit score.

Is it good to refinance a personal loan?

It’s best to refinance a personal loan if you can qualify for a lower rate — if your credit has improved or you’ve lowered your debt-to-income ratio, for example. Refinancing can also lower your monthly payment to make room in your budget, or it can increase your monthly payment so you can pay off the loan faster.

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.

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