Refinancing a Personal Loan: Can It Be Done?

Yes, you can refinance a personal loan, perhaps to get a better interest rate or more affordable monthly payment. To refinance a personal loan, you’ll simply take out a new loan to pay off the old one — which means you’ll have both a new rate and repayment term.

Though it’s relatively straightforward to refinance a personal loan, it may not always be wise, particularly if your new loan has a higher interest rate or a longer repayment term. In both cases, increased interest charges would increase the overall cost of your repayment.

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What is personal loan refinancing?

Personal loan refinancing is when you replace your loan with a new loan that has more favorable terms, such as a lower interest rate or lower monthly payment.

You’ll apply for a loan, either with your current lender or a different one, and, once approved, pay off the existing loan with the funds from the new loan. By doing this, you’ll receive a new interest rate and new loan term.

Pros and cons

Pros	Cons
Lower your interest rate Reduce your monthly payments Consolidate multiple types of debt	Might pay more in interest Origination fees Short-term hit to credit score

Pros

Here are a few reasons why you might want to refinance a personal loan:

Lower your interest rate: Depending on your credit, you might qualify for a lower interest rate through refinancing — which will help you save money on interest charges and potentially pay off the loan more quickly.
Reduce your monthly payments: If you opt for a longer repayment term through refinancing, you could lower your monthly payments. Just keep in mind that choosing a longer repayment term means you’ll pay more in interest over time.
Consolidate multiple types of debt: You can use a personal loan for almost any personal expense. For example, if you take out a personal loan for debt consolidation or credit card consolidation, you could also use it to consolidate your old personal loan.

Cons

Although there are potential benefits that come with refinancing your personal loan, there are also some important potential drawbacks to consider. Here are a few to keep in mind:

Might pay more in interest: If you choose a longer repayment term, you could end up paying much more in interest over the life of the loan.
Origination fees: Many personal loan lenders charge origination fees — sometimes as high as 8% or more, depending on the lender. These fees are deducted before the loan is disbursed to you, reducing the amount of money you actually get.
Short-term hit to credit score: Applying for a loan typically involves a hard credit inquiry, which could lower your credit score by up to 10 points for up to a year.

If you’re thinking about refinancing a personal loan, be sure to consider how much the new loan will cost you over time and if the possible savings are worth it. You can estimate how much you’ll pay for a new loan using a personal loan calculator.

Personal loan calculator

When should you refinance a personal loan?

While refinancing a personal loan might be a good choice in some cases, it isn’t right for everyone. Here are a few situations where personal loan refinancing could be a smart move:

Your credit score has improved: If you have a better credit score than when you originally applied, you might qualify for a lower interest rate. This could help you save money on interest and possibly pay off the loan sooner.
You need to lower your monthly payment: If you refinance and choose a longer repayment term, you could reduce your monthly payments and lessen the strain on your budget.
You want to switch to a fixed interest rate: A variable interest rate can fluctuate with market trends, which means your rate might go up in the future. With refinancing, you can switch to a fixed interest rate, which will stay the same over the life of the loan.

And here are some scenarios where refinancing might not be a good idea:

You don’t qualify for better terms: If you can’t qualify for a lower rate or more favorable terms, then refinancing likely isn’t worth it.
Origination fees outweigh your savings: Depending on the lender, origination fees can be as high as 8% or more. If these fees will eat up the savings you get through refinancing, then it might not be a good idea.
You are about to buy a house or finance another purchase: Taking out a new personal loan can have a slightly negative impact on your credit score, though it’s usually only temporary. However, if you’re planning to apply for a mortgage, auto loan, or another type of financing, then it’s likely better to wait to refinance a personal loan until later so there’s no effect on your credit score.

If you decide to get a personal loan for refinancing, remember to consider multiple lenders to find a loan that suits your needs.

How to refinance a personal loan

If you’re ready to refinance a personal loan, follow these seven steps:

1. Figure out how much you need to borrow

The answer might seem simple enough if you’re just aiming to pay off an existing personal loan. But keep in mind that there may be an origination fee on your new loan, which would be subtracted from the loan proceeds.

So figure fees into how much you need to borrow to complete the refinancing process. Also, estimate your new monthly payment using a personal loan calculator to ensure it fits within your monthly budget.

2. Check your credit score and credit report

To benefit from personal loan refinancing, you’d likely need a better credit score than you had when you secured your original personal loan. With a higher score (and lengthier credit history), you might qualify for a lower interest rate on the new personal loan.

You can check your credit score for free using Credible's credit-monitoring tool. Your bank or credit card issuer might offer free credit score checks.

If your credit (or another financial marker) isn’t up to snuff, you might consider refinancing with the assistance of a personal loan cosigner who agrees to repay the new debt if you can’t. Request a free credit report and look for errors that might be bringing down your credit score.

3. Compare lenders and choose your loan option

Be sure to compare as many personal loan lenders as possible to find the right loan for you. Consider interest rates, repayment terms, fees, and any restrictions the lender might have on refinancing personal loans.

After comparing lenders — you can prequalify without commitment or a hard credit check with top-rated online lenders — pick the loan that works best for your needs.

Keep in mind

Some lenders have restrictions when it comes to refinancing personal loans. For example, LightStream doesn’t allow borrowers to refinance existing LightStream loans — however, you can use a LightStream loan to refinance a loan from another lender.

4. Complete the application

Once you’ve chosen a lender, you’ll need to fill out a full application and submit any required documentation, such as tax returns or pay stubs.

5. Get your funds

The time to fund a personal loan is typically about one week — though some lenders will fund loans as soon as the same or next business day after approval. Make sure to keep up with payments on your old loan while you wait for your funds.

6. Pay off your old loan

Once you have your new loan funds, you can pay off your original loan. Contact your original lender to determine how to do this, then follow their instructions. Afterward, ask your original lender for documentation showing the loan has been paid off.

You can also keep an eye on your credit report to make sure the loan shows as being paid — though keep in mind that it might take up to 30 to 45 days for the new status to show up on your credit report.

7. Begin making payments on your new loan

Confirm your first payment due date and minimum payment amount with your (new) lender to ensure you get off to a good start.

Unlike student loans, personal loans don’t feature a grace period, so you’ll be expected to begin paying down your new balance immediately. Consider enrolling in autopay to ensure you never miss a payment; some lenders might even offer an interest rate discount for doing so.

Does refinancing affect your credit score?

When you apply for personal loan refinancing, the lender typically performs a hard credit check to determine your creditworthiness, which might cause a slight but temporary dip in your credit score.

So does refinancing hurt your credit score? A little, but this impact is usually only temporary, and your score will likely start to recover as you repay the loan.

Tip

Keeping up with payments on a new refinanced loan could actually help your credit score improve over time, which might outweigh the initially negative effect on your score.

Learn More: How Does a Personal Loan Affect Your Credit Score?

Can you renegotiate rather than refinance?

Renegotiating a personal loan may be possible under certain circumstances. Loan modification is typically done for people who are experiencing financial hardship and would otherwise default on their loan. You can request an extended repayment term, a lower interest rate, or lower monthly payments.

Not all lenders will consider renegotiating personal loans, and if you’re not experiencing financial hardship, it may be preferable to refinance instead.

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Disclosure: Some lending partners that participate in Credible’s comparison marketplace offer loans to borrowers with scores as low as 550. Borrowers with low scores will have fewer lending options than borrowers with higher credit scores.

Meet the expert:

Emily Guy Birken