Learn When and How to Refinance a Personal Loan

A personal loan refinance allows you to replace your old loan with a new loan that may have a different interest rate or a different repayment schedule. If interest rates have dropped or are lower than your current rate, or if you need to prolong your repayment term, refinancing may be a viable alternative.


Securing a lower refinancing rate lowers the cost of borrowing, resulting in a reduced overall payment on your personal loan. If you’re having trouble making your minimum loan payments, refinancing to a longer loan term will result in lower minimum monthly payments (though you’ll pay more toward the loan overall owing to interest rates).

If you believe that refinancing your personal loan is a good option for you, investigate your options to choose your next actions.

What does refinancing a personal loan entail?

When you refinancing a personal loan, you apply for a new loan — either with the same or a different lender — and then use the proceeds to pay down your old loan. Then you’ll start making payments on your new loan, which has a different interest rate and terms.

You may wish to do this for a variety of reasons, but ideally, as part of the process, you should be able to receive a new, higher interest rate.


When is it a good idea to refinance a personal loan?

If refinancing your loan will save you money, it almost always makes sense. There are numerous instances in which significant savings may be realized.

Here are some other instances where it might make sense:

  • You have a higher credit rating. Improving your credit score is one of the best methods to qualify for a lower interest rate on your personal loan. If your credit score has improved since you took out your loan, this could be an excellent reason to refinancing.
  • You want to change the rate type. A variable APR on a personal loan makes budgeting for monthly installments difficult. Not only that, but you may see an upward tendency that ends up costing you more money. You can switch from a variable to a fixed rate by refinancing, giving you regular payment amounts each month.
  • You want to avoid having to make a balloon payment. Some personal loans include a balloon payment, which requires you to make a substantially bigger payment than the regular monthly amount at the conclusion of your repayment period. You can prevent this type of personal loan by refinancing ahead of time.
  • Your income has decreased, thus you require lower monthly payments. If you’ve lost your job or your income has decreased, you may be trying to minimize your monthly loan payment. In this instance, you may choose to refinance your current loan for a longer repayment term, which may not save you money in the long run but may lower your monthly payment.
  • You want to pay off your loan as soon as possible. If you can afford higher monthly payments, you might wish to refinance into a loan with a shorter term. Paying down your loan in a shorter period of time will save you money in interest.
  • You can pay the fees. Fees may be incurred when obtaining a refinance loan, such as origination or application fees. If you pay off your loan before the repayment period finishes, your current lender may charge you a prepayment fee. Before applying for a refinance loan, make sure that refinancing still makes financial sense after costs are deducted.

If you are ready to refinance your loan, begin with the steps below.