Personal loans can provide you with funding to meet a variety of needs, from consolidating debt to paying for emergency expenses.
You might assume that if you already have a personal loan, you can’t refinance it into a new loan.
But personal loan refinancing might be an option and there are certain situations where it could be a smart move.
Why Refinance a Personal Loan?
Refinancing simply means taking out a new loan and using the proceeds to pay off an existing loan. So why would someone bother to do that?
There are lots of reasons why you might choose to refinance a personal loan. Here are some situations where you might consider personal loan refinancing:
Lower rates
Personal loans can charge interest like any other loan but you aren’t necessarily stuck with the same rate.
Refinancing could help you to get a better personal loan with a lower rate, which could save you money on interest charges.
Comparing refinance rates might get a good option if your credit scores have improved since taking out the original loan.
Switching from a variable to a fixed rate
Variable rate loans have interest rates that can move up or down, according to movements in an underlying benchmark rate.
Variable rate loans can work in your favor when rates are low but they can become more expensive when rates increase.
Refinancing to a fixed rate can help you cap what you’ll pay in interest charges.
Taking out a larger loan
It’s possible that you may need to borrow additional money in which case, you could refinance your old loan into a new, larger one.
For example, you might have borrowed $15,000 to do some home remodeling, only to find out it’s going to take another $5,000 to finish the project.
In that case, refinancing could help you get the extra cash you need and potentially result in a lower rate for the existing balance.
Lower monthly payments
Refinancing a personal loan could result in a lower monthly payment if you’ve paid down a significant amount or you’re extending the loan term.
That could make repaying the loan more workable for your budget but keep in mind that choosing a longer repayment term might increase the total amount of interest you pay.
Using an online personal loan calculator is a good way to estimate your potential interest savings from refinancing. You could also use a calculator to estimate your new loan payments to ensure that it’s a good fit for your budget.
When to Refinance a Personal Loan
Having a good reason to refinance a personal loan doesn’t necessarily make it a good idea. It’s also important to consider the timing and your overall financial situation.
For example, refinancing could make sense if:
- Your credit score has improved and you think you could get a better rate
- You have a variable rate loan and you’re worried about rate hikes making your loan more expensive
- Your current monthly payments are putting pressure on your budget and you want to try to lower them
- You’re not planning to apply for any other major financing, like a mortgage
On the other hand, refinancing may be less appealing if your credit score hasn’t budged much since you took out the loan or it’s gone down a few points.
It might be more difficult to get a better rate in that scenario.
You may also want to avoid refinancing a personal loan if you’re on the verge of applying for a home loan since a hard credit inquiry could cost you credit score points.
How to Refinance a Personal Loan
Refinancing a personal loan isn’t that difficult. In fact, it’s something you can do online. Here’s how personal loan refinancing works.
Step 1: Compare personal loans online
There are lots of lenders that offer personal loans for refinancing and it’s important to compare the options to see what kind of rates and terms are available.
If possible, you may want to get multiple rate quotes to estimate your potential interest savings.
Keep in mind, however, that if a lender requires a hard credit pull for a rate quote that could ding your credit score.
Step 2: Choose a lender and complete the loan application
If you’ve compared personal loan options and settled on a lender, the next step is filling out the application.
The process can take just a few minutes if you’re applying online.
You’ll need to give the lender your personal information and tell them how much you want to borrow. You may also need to provide financial documentation, such as pay stubs or tax forms, to verify your income.
Step 3: Review the loan offer
Assuming you’re approved for a personal loan, review the loan offer before committing.
Check the interest rate, monthly payment, and loan term to make sure you’re comfortable with them. Also, be sure to read the fine print to look for any hidden fees, such as an origination fee or prepayment penalty.
Step 4: Sign the loan documents
If everything looks good, you’ll need to sign off on the loan paperwork.
If you’re working with an online lender, they should provide you with the documentation electronically. Remember that once you sign on the dotted line, you’ve agreed to accept the loan proceeds and repay what you borrow.
Step 5: Receive loan funds
After you’ve signed the loan documents, the lender will forward the loan funds to you. Typically, they’ll deposit it directly into your bank account, though they may give you the option to pay off your old loan for you. In that case, any remaining loan funds left over would be transferred to you.
Step 6: Pay off the old loan
If your new lender doesn’t pay off your existing loan with the loan proceeds, you’ll need to do that yourself.
Once the funds from the new loan hit your bank account you can either write a check to your original lender or schedule an electronic payment to cover the outstanding loan balance.
Step 7: Work on paying off the new loan
Once the old loan is paid off, you can focus on repaying the new loan. You may want to ask if your lender offers any incentives for early payments or automatic payments, such as a rate discount.
Lenders That Offer Personal Loan Refinance
There are a variety of lenders that will allow you to refinance personal loans. Comparing them can help you to choose the right lender for you. Here are a few of the top options for personal loan refinancing.
Upstart
Best for: Borrowers who are looking for a longer repayment term
Upstart offers up to $50,000 in loan funding for eligible borrowers, with competitive fixed interest rates.
You can choose from a three-year or five-year loan term and there’s no prepayment penalty for paying the loan off early. You can check your rates with Upstart without affecting your credit.
Happy Money
Best for: Borrowers who have other debts to consolidate
Happy Money personal loans have no prepayment penalties or late fees and borrowers can change their due date if necessary.
You can borrow up to $40,000 and loan terms can extend up to 60 months. It’s important to note that there is an origination fee for Happy Money loans.
Prosper
Best for: People who want to apply with a co-borrower
Prosper offers personal loans ranging from $2,000 to $40,000, with three and five-year repayment terms. You can apply for a Prosper loan with a co-borrower or by yourself, though having a co-borrower with good credit could make it easier to qualify for a lower rate.
Marcus by Goldman Sachs
Best for: People who want to avoid high loan fees
Marcus by Goldman Sachs personal loans have no hidden fees, including no origination fees, no prepayment penalties, and no sign-up fees.
You can borrow up to $40,000 if you qualify and getting prequalified for a loan won’t hurt your credit score.
Achieve
Best for: Borrowers with lower credit scores
Achieve extends personal loans of up to $40,000 to borrowers and there’s no minimum income requirement to apply. It’s possible to qualify for a Achieve loan even if you have less than perfect credit, though keep in mind that you might pay a higher rate.
When It Might Not Be a Good Idea to Refinance
As mentioned, refinancing a personal loan may be better in certain situations than in others.
You may want to reconsider refinancing if you:
- Would have to pay a hefty origination fee to get a new loan
- Are unable to qualify for a new loan with a lower rate based on your credit score
- Want to lower the monthly payment, which would mean extending the loan term
- Have already paid off most of the loan
- Can get a better deal through your credit card
The origination fees are too high
Origination fees are fees you pay to the lender simply for giving you the loan.
These fees get deducted from the loan proceeds before they’re handed over to you. For example, your lender might charge a 5% origination fee. On a $10,000 personal loan that adds up to $500. If your primary goal for refinancing a personal loan is to save money, the origination fees don’t exactly help with that.
You don’t qualify for a new loan
It may be possible that you just don’t qualify for a refinance loan, based on your creditworthiness. In that case, you could consider other options for managing the debt.
For example, you could ask the lender if they might be willing to adjust the loan terms if you need to lower the monthly payment. The lender doesn’t have to agree but it could be worth asking about if you’re experiencing financial hardship.
Your credit card offers a better deal
You could also look into a 0% APR credit card balance transfer offer to refinance personal loan debt. You could transfer the loan balance to the credit card, then pay zero interest until the promotional period ends. You might pay a credit card balance transfer fee but it could be lower than what you might pay for a loan origination fee.
You can use an installment loan calculator to see how personal loan terms, amounts, and interest rates stack up against each other in various scenarios.
Do’s and Don’ts of Personal Loan Refinancing
If you’re interested in getting a personal loan for refinancing, here are a few things to do (and a few things to avoid).
Refinancing a personal loan doesn’t have to be a hassle. The more research you do beforehand, the easier it can be to find the right loan
Frequently Asked Questions (FAQs)
Can a personal loan be refinanced?
Yes, it’s possible to refinance a personal loan into a new loan. You’ll need to apply for a new loan and get approved, then use the loan proceeds to pay off your existing balance.
Does refinancing a personal loan make sense?
Personal loan refinancing could be right for you if it saves money or allows you to lower your monthly payment. You might also consider refinancing a personal loan if you need to borrow a larger amount or you want to change the loan term.
Does refinancing hurt your credit?
Refinancing a personal loan can affect your credit, since the lender may need to do a hard credit pull in order to approve you. But refinancing could help your credit over time if it allows you to pay down your debt balances faster.
