How To Refinance a Personal Loan and When It’s Smart

If you have a personal loan and can qualify for a lower rate or payment — because your financial situation has changed or rates have come down — refinancing could save you money. If you're struggling to afford the monthly payments due to a loss of income or other complications, refinancing could give you more breathing room.

Learn how refinancing works, how it affects your credit score, and whether it's a good idea in your situation.

What does it mean to refinance a personal loan?

Refinancing means replacing your existing loan with a new personal loan, with the goal of getting a lower interest rate, lower monthly payment, and/or lower total repayment cost. You may be able to refinance with your current lender if you meet the requirements, or you may need to apply with a different lender and then use the loan proceeds to pay off your current loan.

How refinancing a personal loan works

If you're approved for a new personal loan, the lender will provide a lump sum of cash you can use to pay off your current personal loan. You'll then repay the new lender in fixed monthly payments over time, with typical repayment term options ranging from one to seven years.

If you have other types of debt, like high-interest credit card debt, you can apply for a personal loan large enough to pay off all your existing debts, leaving you with one monthly payment to the new lender. This type of loan is known as a debt consolidation loan, and the process is similar to refinancing.

One benefit of consolidating credit card debt with a personal loan is that, depending on your credit score, you could qualify for an interest rate lower than your credit card rate. Here are average APRs for debt consolidation loans, by credit score, based on Credible personal loan data from the last 12 months:

Pros and cons of personal loan refinancing

Pros

• Might save you money on interest: If you get a new loan with a lower APR (annual percentage rate) and don't extend the repayment term, you'll pay less in total interest and achieve a lower monthly payment. You can also save money by shortening the repayment term, even if the APR stays the same.
• Could lower your monthly payment: By extending the repayment term or qualifying for a lower APR, you could get a lower monthly payment. A lower monthly payment could also help you avoid missing payments, which can lower your credit score.
• Could help improve your credit score long-term: Getting a lower rate or a smaller monthly payment (or both) can make it easier for you to repay the refinanced loan on time. Payment history accounts for 35% of your overall FICO score, the most of any category.

Cons

• Initial credit impact: The hard credit inquiry that typically accompanies a personal loan application could lower your credit score by as much as 10 points for up to 1 year. But, as outlined above, successfully repaying the loan can improve your credit in the long run.
• Potential upfront fees: Some loans come with an origination fee. The fee is typically a percentage of the loan that's deducted from the funds you receive. Depending on the lender and your credit score, origination fees could range from less than 1% to as much as 15%. If the new loan has an origination fee, you may need to borrow more than your existing loan balance to pay it in full.
• Possible increase in overall cost: If your aim is to lower your monthly payment, it may require you to extend the repayment term, which could result in paying more interest over time.

How refinancing a personal loan affects your credit score

Most lenders perform a hard credit inquiry before approving you for personal loan refinancing, which temporarily lowers your credit score. But most people's FICO scores decline by less than five points.

In addition, “Closing the old loan may affect the length of your credit history, which may in turn have a small negative effect on your credit rating,” says Todd Christensen, author and Education Manager at Money Fit by DRS. But responsible payments on your new personal loan could turn things around. “Making on-time payments on the new loan over time usually helps your credit profile recover quickly and can improve your score if it allows you to reduce your overall debt load,” says Christensen.

On the other hand, missed or late payments on the new loan could further damage your credit. To avoid hurting your credit, make sure you understand the new loan terms and budget for your new monthly payment.

When is refinancing a personal loan a smart idea?

There are obvious reasons to refinance a personal loan — like when you can qualify for a lower interest rate or need a lower payment. “Other reasons include the potential removal of a former spouse, such as in the event of a divorce,” says Dan Hummert, CFP, CRPC, President & Senior Financial Advisor at Hummert Financial.

You might find refinancing beneficial if:

• Your credit score has improved significantly since you took out your current personal loan
• You applied for your current personal loan during a period of high interest rates, and better rates are available now
• You were offered a discounted rate on a personal loan because you have a bank account or credit card with the lender or are a member of a professional organization
• You applied with a cosigner and want to release them from responsibility for the loan
• You applied jointly with a spouse and want to disconnect from your spouse financially
• You're struggling to afford the monthly payment on your current personal loan
• You're unhappy with the customer service with your current lender

If your intention is to save money, use a personal loan calculator to ensure refinancing will achieve that goal.

If you can't qualify for favorable refinancing terms, or if you'll continue to struggle financially with a lower monthly payment, you may want to consider other options. Working with a credit counselor to enroll in a debt management plan could help you get back on your feet.

“A DMP may help if the consumer is behind a month or two on payments, needs structured support and accountability, wants to negotiate lower interest rates, or would benefit from creating a realistic payoff plan,” says Christensen.

How to refinance a personal loan

1. Review your current loan agreement: Check to see whether you can refinance the loan with your current lender. Note your remaining balance, the loan payoff date, and the lender's instructions for early repayment.
2. Check your credit score: Use Credible's free credit-monitoring tool to check your credit score and note whether your score has improved since taking out your current loan. Research lenders that serve borrowers with credit scores similar to yours — for example, lenders offering personal loans for good credit or fair credit.
3. Prequalify with multiple lenders: Prequalify with a few lenders to get an estimated APR without damaging your credit. You might need to provide your Social Security number and other information, but the process only takes a few minutes. Keep in mind, prequalification doesn't guarantee loan approval and isn't an offer of credit.
4. Compare your options: Compare APRs, repayment terms, monthly payments, and total costs of each loan option. Evaluate each lender's reputation for customer service on third-party sites like Trustpilot.
5. Formally apply with your chosen lender: Choose the loan option that best meets your needs and proceed with the loan application, uploading any requested documents like pay stubs or tax returns. At this point, the lender will typically perform a hard credit check before making a decision.
6. Sign your loan documents: Read the new loan agreement carefully, looking for hidden fees and penalties. Sign the documents and wait for the lender to transfer the funds to your bank account. If you're taking out a debt consolidation loan, some lenders can send the loan funds directly to your creditors.
7. Pay off your old personal loan: Use the funds to pay off your previous personal loan according to the lender's instructions.
8. Begin repaying your new personal loan: Note the due date for your first payment. You may want to set up autopay to avoid accidental late payments.

Lenders that offer personal loan refinancing

In some cases, you may be able to refinance an existing personal loan with the same lender. Examples include:

• Achieve
• Avant
• Best Egg
• LendingClub
• SoFi
• OppLoans
• USAA Bank

Most lenders allow you to use a personal loan for almost any household expense, which often includes loan refinancing and debt consolidation. Lenders that let you refinance a personal loan from another lender include:

• Achieve
• BHG Financial
• Discover
• LendingClub
• Happy Money
• LightStream
• Splash Financial
• Rocket Loans