Can You Refinance a Personal Loan?
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At a Glance
Refinancing a personal loan is when you take out a new personal loan and use that money to pay off the old loan. The goal of refinancing a personal loan is to save money by getting a lower interest rate. You’ll still have the same amount of debt, but the lower interest rate will mean you’ll pay less in the long term by saving on the amount of interest owed.
So, can I refinance a personal loan? These guidelines give a glimpse at when and how to refinance a personal loan:
When to refinance a personal loan?
The loan will save you money
Refinancing a loan isn’t a guaranteed way to save money. While getting a lower interest rate is ideal, if the new loan term is longer than your current one, you could wind up paying more in interest long-term, even if your monthly payments are lower. If your loan term is shorter, your monthly payment will increase, but you’ll pay less interest over the long haul.
Also consider whether your new loan has an origination fee, which could potentially cancel out any savings in interest.
Your credit score has improved
You’re not likely to get a better interest rate if your credit score has stayed static or dropped since taking out your original loan. An improved credit score is likely to land you a better interest rate, as is a better debt-to-income ratio.
You want to change your rate type
Switching from a variable interest rate to a fixed interest rate could be beneficial to give you peace of mind with a steady monthly payment. Variable interest rates can be difficult to plan for, not to mention they can inflate.
You want to avoid a balloon payment
Some personal loans come with a balloon payment. This is a lump sum due at the end of a loan term that’s much greater than the regular monthly payment. Refinancing this type of loan before the balloon payment is due is a way to avoid paying that fee.
You don’t have a pending big financial decision to make
If you’re looking to take out a mortgage or buy a car around the same time you’re considering refinancing a loan, you may want to hold off. Applying for a personal loan requires a hard credit pull, which temporarily drops your credit score. This can affect the rates you’ll get on a mortgage or car loan.
There are no better options
One alternative to refinancing a personal loan is getting a balance transfer credit card. But whether this is a better option depends largely on your credit score and the card itself.
Related: Can you do a balance transfer on personal loans?
How to refinance a personal loan?
The steps to refinancing a personal loan are like the steps involved with obtaining your original personal loan.
Determine how much money you need
Before you start shopping, figure out exactly how much money you need to borrow to pay off your existing loan. Figure out if there’s a prepayment penalty that would counteract the benefits of refinancing.
Check your credit score/report
Knowing your credit score is key to determining whether you’ll qualify for a better interest rate. If your score hasn’t improved, you likely won’t be eligible for better rates. Check your fico score using our credit score estimator tool. Determine if lenders will do a soft or hard credit inquiry to give you a quote.
Take a deep dive to compare different lenders to see where you can get the best personal loan rate. Try to avoid origination fees if you can.
Use our personal loan calculator to help determine what makes the most sense for you.
See if asking about the loan’s interest rate will affect your credit score
Usually, you can shop around for rates via peer-to-peer lenders without your credit score taking a hit. It’s not until you close on a loan that your credit score takes a slight, temporary dip.
Contact the lender of your choosing
Once you’ve done your research, discuss the loan terms directly with the lender you choose. Make sure you understand everything they’re offering. Read the fine print before signing anything.
Refinancing with a personal loan vs. balance transfer credit card
A balance transfer credit card can be a good alternative to a personal loan. Many balance transfer credit cards come with a 0% introductory annual percentage rate (APR). The duration of these offers can range from a year to 21 months.
The downside of a balance transfer is it can come with a balance transfer fee of 3% to 5%. Plus, when the offer expires, the APR tends to be high.
You may not be able to get a high enough credit limit on a balance transfer card to accommodate your total debt. And even if you can, you might end up hurting your credit utilization ratio, which makes up 30% of your FICO score.
Pros and cons of refinancing a personal loan
There are advantages and disadvantages to refinancing a personal loan.
- Lower interest rate: You likely can get a lower APR on your new loan if you’ve improved your credit score, income, or debt-to-income ratio
- Pay off the loan faster: Making a higher monthly payment means you’ll pay off the loan more quickly and pay less interest. This could also help you negotiate a lower interest rate with your lender.
- Extend repayment period: If you’re having trouble making monthly payments, you can get some relief by extending the loan term. You’ll lower your monthly payment, but also probably pay more interest in the long run.
- Longer term could mean more interest: Unless you’re able to get a much lower interest rate, a longer repayment period means paying more interest over the course of the loan. And you’ll be in debt longer.
- Origination fees: Depending on the lender, you could face an origination fee, ranging from 1% to 8% of the amount of the loan. If this fee is more than the potential interest savings, refinancing may not be worthwhile.
- Prepayment penalty: Paying off your original loan early could result in a prepayment penalty, though most online lenders don’t charge these fees