How to Refinance Your Personal Loan

Interest rates dropped almost 1% between the end of 2019 and the end of 2020, so now may be a great time for a personal loan refinance. Refinancing your personal loan could save you hundreds or even thousands and help you get out of debt faster. Understanding how to refinance a personal loan can be a powerful financial tool in your repertoire. While the average interest rate of a 24-month personal loan is still 9.34% according to the Federal Reserve, it’s still on the lower end of many of the best personal loans providers’ advertised interest rates.

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In this article

    What’s a refinance personal loan?

    A personal loan refinance involves taking out a new loan and using it to pay off your current one.

    Typically, the goal of refinancing is to save money by getting a loan with more favorable terms, like a lower interest rate or a shorter repayment period. But refinancing can actually cost you money in some cases.

    [ Read: Can Personal Loans Improve Your Credit Score? ]

    If you choose a longer term to lower your monthly payments, you’ll pay more interest over the life of your loan. But extending your loan may still be a good financial move, especially if you’re having trouble affording your current payment.

    If your existing loan has prepayment penalties or your new loan comes with high origination fees, you could also end up spending more than you save. That’s why it’s important to run the numbers and make sure refinancing is worth it for you.

    What does it mean to refinance a personal loan? 

    When you refinance, you replace your existing personal loan with another one, getting a new APR and term length in the process. Refinancing doesn’t change the amount of debt you have, but it can still save you money if you qualify for a lower interest rate or shorter loan term.

    Because you need to take out a new loan to refinance, you’ll have to go through the application process again. But spending your weekend filling out applications and checking rates can be worth it for the potential savings. Interest rates for personal loans are at a three-year low, so you may be able to save hundreds or even thousands by refinancing.

    [ Related: Has the Pandemic Made It Easier to Get a Personal Loan? ]

    New APR

    As mentioned above, you may be able to get a lower APR and save on interest by refinancing your personal loan. If your credit score is higher than when you first applied or interest rates have fallen, it will be easier to find a loan with lower rates than your current one.

    Another reason you may want to refinance is to switch from a variable APR to a fixed rate so you have a more consistent monthly payment.

    New terms

    You can also change your loan term by refinancing. Depending on your financial goals, you may want to choose a longer or shorter repayment period.

    Refinancing into a shorter term will help you pay off your loan faster and save money on interest. However, doing this may increase your monthly payment, so it’s important to run the numbers and make sure you can afford it.

    Choosing a longer term, on the other hand, will increase the amount of interest you pay over the life of your loan. But it can also lower your payments, giving you more wiggle room in your monthly budget. If you’re having trouble affording your payments or want more cash flow to meet other financial goals, refinancing into a longer term may be right for you.

    [ Related: The Best Personal Loans for Good Credit ]

    How refinancing a personal loan affects your credit score

    Refinancing a personal loan may cause your credit score to drop by a few points but can improve your financial health in the long run.

    Most lenders will make a hard inquiry on your credit report when you apply for a personal loan, which can cause your credit score to drop slightly. Hard inquiries only stay on your credit report for two years. If you make timely payments on your new personal loan, your credit score should bounce back.

    Closing your old personal loan can also hurt your credit if it lowers the average age of your accounts, which makes up about 15% of your FICO Score.

    But factors like your payment history and total amount of debt have a bigger impact on your credit score. So if refinancing your personal loan will help you make your payments on time and pay down your debt faster, it may be worth the temporary hit to your credit.

    [ Read: Multiple Personal Loans and Your Credit Score ]

    Pros and cons of refinancing a personal loan 

    ProsMay get a lower interest rateCould pay off debt fasterMakes it easier to budget
    ConsMay pay origination fees Could pay more in interestCredit score may go down

    How to refinance a personal loan

    If you’re interested in making this move, here’s a step-by-step guide on how to refinance your personal loan.

    1. Check your credit. Knowing your credit score can help you figure out which lenders are right for you and can help you determine if it’s a good time to refinance. If your credit score is lower than when you first applied, you may have trouble qualifying for loans with better interest rates.
    2. Check your current loan agreement for penalties. Some lenders may charge you a penalty for paying off your loan early, which can make refinancing more expensive.
    3. Shop around. Interest rates can vary widely between lenders, so it’s important to shop around if you want to get the best deal. Get pre-qualified for a few different loans and compare their rates and fees.
    4. Crunch the numbers. Now that you know what interest rates you qualify for, do some calculations to make sure refinancing is worth it. How much will you save with your new interest rate after factoring in fees like prepayment penalties? If you aren’t going to save money, will refinancing give you other benefits like lowering your monthly payment? If not, it may not be the right move.
    5. Fill out the application. If you still want to move ahead with refinancing, fill out an application for the loan you’ve chosen. Your lender will probably ask you for financial documents like your pay stubs and bank statements, so make sure you have them on hand.
    6. Pay off your old loan. Once your loan application is approved and the funds are deposited, use them to pay off your old loan and close the account.

    [ Read: How to Refinance Your Mortgage ]

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    Reviewed by

    • Courtney Mihocik
      Courtney Mihocik
      Loans Editor

      Courtney Mihocik is an editor at The Simple Dollar who specializes in personal loans, student loans, auto loans, and debt consolidation loans. She is a former writer and contributing editor to,, and elsewhere.