At a Glance

In some cases, refinancing a personal loan can be a great way to pay off your debt faster and save money. If you got a personal loan with a high interest rate, refinancing can get you a lower rate, reduce your number of monthly payments, and ultimately save you money on interest.

However, there are some factors to consider to make sure you’re getting a good deal that will benefit you in the long run. In this article, learn more about:

What does it mean to refinance a personal loan?

When you refinance a loan, you’re replacing your old, existing loan with a new one. You can then use the new loan to pay off your old one, and ideally, the new loan has better terms or a lower interest rate which can help you pay off your loan faster and save you money in the long term.

You can refinance your loan with the same lender as your existing one, or with a new lender. Either way, though, it is important to shop around for the best option.

When is the best time to refinance a personal loan?

There are a few situations when refinancing a personal loan may be a good decision:

Switching your rate type

The two types of interest you will find with personal loans are fixed and variable rates.

  • Fixed rates mean the rate does not change over time, so your monthly payment will remain the same over the loan’s term. This makes your payments easier to budget and calculate how much you’ll owe in interest over time.
  • Variable rates do change over time, so your monthly payment can change and it can be more difficult to plan for payments or calculate how much you’ll owe in the long-run.

If your current loan has a variable interest rate, you may want to change to a fixed rate for budgeting purposes. It can also save you money because with variable rates, they could increase and you’d pay more than a fixed rate.

Improved credit score

The better your credit score, the more competitive interest rate you will receive. If you have a great or excellent credit score – typically 670 and above – you will likely qualify for a lower interest rate.

If your credit score has improved since you got the original loan, you may now qualify for a better interest rate. Having a lower rate means you will pay less in interest over time, which can save you money.

Decreased income

If your income decreased and you need lower monthly payments, refinancing can help you accomplish this by changing the term of the loan to a longer repayment period. The longer a loan’s repayment period, the lower the monthly payments will be because you have more time to pay it off.

However, keep in mind that longer terms also mean paying more interest over the life of the loan.

Paying off the loan faster

Refinancing may allow you to switch to a different loan term, which is the period you have to repay the loan in full. Switching from a longer repayment period to a shorter one means you will have fewer monthly payments and can pay off your loan faster.

Ability to afford fees

Refinancing your loan may mean you have to pay fees or other penalties, such as application fees or origination fees. You may also face prepayment penalties on your old loan. Make sure you understand any fees you would have to pay and be sure you can afford those fees if you do refinance.

Decreased interest rates

In general, average interest rates can increase and decrease over time. If interest rates drop and you’re able to get a lower rate than you have on your existing loan, you should consider refinancing.

Pros and cons of refinancing a personal loan

Advantages of personal loan refinancing

  • Lower interest rate. A great time to refinance is if your credit score has improved and you qualify for a lower interest rate than your existing loan. This can help save you money over the life of the loan.
  • Faster loan payoff. Having a lower interest rate can help you pay off your loan faster, but refinancing may also allow you to get a shorter repayment term, which means you have fewer monthly payments to make, and your loan will be paid off in full in a shorter period of time.
  • Extended repayment periods. On the other hand, if you need a longer repayment period than your existing loan, you may qualify for this through refinancing. This can lower your monthly payments and give you more time to pay off the loan.
  • Reducing the number of payments. If you can decrease your term, you will also reduce the number of payments you will have to repay the loan in full.

Disadvantages of personal loan refinancing

  • Extra fees. Some personal loans have application fees, origination fees, or others and if you’re refinancing, you may have to pay a fee to terminate the old loan and begin a new one. These fees will add to the total amount of the loan, so be sure to know
  • Prepayment penalties. Some lenders charge more for paying off your loan early. This could be done by making extra payments or paying more than the minimum amount each month.
  • Potentially higher interest costs. Refinancing does not guarantee a lower interest rate. In fact, if your credit score decreased since your original loan application, or other financial aspects have changed, your new interest rate may be higher.
  • Impacts to credit score. Refinancing can have a negative impact on your credit score. First, the lender will perform a hard credit inquiry to check your credit score and history, which can cause your score to decrease for a brief period of time. Then, if you are approved for the refinancing, your original loan will be closed. Because some credit scores take into consideration the length of your accounts, this could also decrease your score.
  • Research and preparation. An important part of refinancing is researching and comparing lenders and loans. During this time, you can get an understanding of what lender can offer the best interest rate and most favorable loan terms. Part of this process also includes getting prequalified if you can. But shopping around and preparing for the loan application can take time.

Plus, it can take several business days to learn if you are approved for the loan, and even more time to get the funds. The entire process could be a few weeks depending on how much research you want to do.

Refinance personal loan calculator

Using a personal loan calculator, you can estimate your interest rate, monthly payments, and repayment terms based on your credit score and loan needs. It can also help you determine any other fees or penalties you may face.

What happens when you refinance a personal loan?

Once you’ve determined how much of a loan you’ll need, have shopped for the right lender, and decided on your best option, it is time to apply for the loan. These applications, which can usually be found online, are like applying for traditional personal loans.

  • When you start the application, you will be asked to provide basic information like your name, birthday, address, and contact information. You will then be asked to provide financial information, like your income, employment, other debts, etc. Another part of the application is entering the total loan amount you need and the period you would like to repay the loan over.

During this process, you may have to submit documentation proving your identity, address, income/employment, or others. Preparing this information and documentation ahead of time can help the application process go smoother.

  • Once your application is submitted, you will go through a loan underwriting process and will either be approved or rejected for refinance. If approved, you will receive the funds from your new loan. This may be via a direct deposit in your bank account, a paper check, or the lender may pay your creditors directly.
  • After receiving those funds, you’ll need to use them to pay off your existing loan. Do this as soon as possible to avoid accruing interest, fees, or making double loan payments, since you’ll have to start making monthly payments for your new loan immediately.


Can you refinance a personal loan with the same bank?

Yes, you can use the same bank as your current loan to refinance. While you should shop around and compare different lenders, you may get the best deal from your current bank. However, not all banks allow you to do this, so contact your bank to learn more.

Can you refinance an unsecured personal loan?

Yes, you can refinance an unsecured loan. It may be a good idea to consider refinancing if your credit score has improved, your income decreased, you want to pay off your loan faster, or if interest rates have dropped.

How often can you refinance a personal loan?

Technically, you can refinance a personal loan as many times as you can get approved. However, it is not always a good idea. Applying for a loan triggers a hard credit inquiry, which can decrease your credit score.

How to refinance a personal loan with bad credit?

It is possible to refinance a personal loan with bad credit, but chances are the interest rate you qualify for won’t be better than your existing loan. In that case, it wouldn’t make sense to refinance. Some online lenders consider other eligibility requirements or may allow you to refinance with a secured loan, so be sure to do research to understand your options.