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: 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.
Let’s say you have a $25,000 balance on a loan with a 10% annual percentage rate (APR), and your monthly payment is $600. You qualify for a new loan with a 6% APR that lets you refinance the current balance over a four-year term.
Refinancing would save you about $2,418 over the life of the loan and shave $12.87 off your monthly payment.
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 interest rate if your credit score has improved since you took out your original personal loan.
When to refinance a personal loan
Your credit has improved or you’ve paid off other debts. Your credit score may have gone up if you’ve consistently made loan payments on time, particularly if you used your loan to pay off credit card debt. You may qualify for a lower rate on a new loan, in which case refinancing could save you money. Borrowers with good or excellent credit (mid-600s and higher) and a low debt-to-income ratio typically receive the lowest personal loan rates.
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 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.
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.
» CALCULATE: See if refinancing saves you money
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 has decreased. Paying off other debts and making on-time payments can help build your score back up. If interest rates have gone up since you took out your loan, it may be difficult to find a better rate, even if your credit has improved.
You’ll pay a high origination fee. A new loan may come with an upfront charge called an origination fee that could 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. However, the charge is often deducted from your loan proceeds, so a high origination fee could eat into the funds you need to pay off your existing loan.
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 APR 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. 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.
You want to see your old loan balance hit zero before you stop making payments on it to avoid accidentally missing one. You could owe late fees immediately, though some lenders have a grace period of about 15 days. Missing a payment by more than 30 days 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 |
|---|---|---|
| From Upgrade or another lender. | 7.99% - 35.99%. | |
| Only from other lenders. | 6.49% - 24.89%. | |
| Only from other lenders. | 8.99% - 35.49%. | |
| Only from other lenders. | 7.99% - 24.99%. | |
| From Wells Fargo or another lender. | 7.49% - 23.74%. | |
| From Best Egg or another lender. | 6.99% - 35.99%. |
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 because the lender typically performs a hard credit check. As long as you make your full monthly payments on time, refinancing shouldn't have a long-term negative effect on your credit score.
Frequently Asked Questions
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.
When should you not refinance a personal loan?
Refinancing a personal loan usually isn’t worth it if you can’t lower your APR or your monthly payment. Think carefully before refinancing a personal loan over a longer term, as doing so keeps you in debt longer and could result in paying more interest.
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