Are you having trouble making your personal loan payments? If you’re looking for lower interest rates, longer terms or want to avoid a balloon payment, refinancing your personal loan might be the right option for your situation. A personal loan refinance can help you lower your monthly payment while changing your rate, term or loan type.
Let’s take a look at what a personal loan refinance is, how to know whether it’s right for you (or when to wait) and the pros and cons of this option.
What Is A Personal Loan And Can You Refinance One?
Can you refinance a personal loan? The short answer is yes. But first, let’s go over what a personal loan is and what it means to refinance one.
A personal loan is a form of financing you can use for a variety of reasons, including making large purchases, consolidating debt, paying for emergencies and more.
Most personal loans are unsecured, which means borrowers don’t have to put up anything as collateral, unlike secured loans that require collateral to back the loan. Usually, lenders offer loan terms between 12 – 60 months, but in some cases, they may offer personal loans with longer repayment periods.
A personal loan refinance happens when a borrower takes out a new personal loan in order to pay off the old one(s). They’ll get a new rate and loan term, as well as a new monthly payment. But keep in mind that not all lenders allow refinances on personal loans.
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When Should You Refinance A Personal Loan?
While a personal loan refinance can be a great option to help streamline a borrower’s financial situation, it’s not the right choice for everyone. Before you start shopping for a new loan, you should first determine what refinancing your existing loan would accomplish.
Would a refinance allow you to save money, act as a form of debt consolidation or give you more breathing room in your budget? You should also consider external factors, like market rates and lender policies: Could you get a lower interest rate? Would your lender charge you fees?
To additionally help you decide whether a personal loan refinance is right for you, compare your situation to the ones listed below.
When To Refinance A Personal Loan
People take out different types of personal loans at different times in their lives. But only some borrowers should consider refinancing a personal loan. If you’re experiencing one of the following situations, refinancing may be beneficial:
You Could Secure A Lower Rate
When interest rates go down, a refinance might help you save money over the long term. That’s because a lower rate means less of your monthly payment goes toward interest. Even a small interest rate reduction can save you money over the life of the loan. Just make sure market rates have dropped sufficiently and that you have excellent credit before applying.
You Have A Variable-Rate Personal Loan
Refinancing to a fixed rate might be preferable if you previously took out a variable-rate loan. A fixed interest rate is one that stays the same throughout the life of the loan, while a variable interest rate changes based on certain market conditions. You can depend on a fixed interest rate to stay the same, while variable interest rate payments can be unpredictable.
You Can’t Afford The Current Monthly Payment
Replacing your personal loan can also help if you’re currently carrying a monthly payment you can’t afford. You may be able to lengthen the term of your personal loan, which makes the payment lower each month.
When To Wait On Refinancing A Personal Loan
It’s important to weigh the costs and benefits when you’re thinking about refinancing. In some cases, the timing might not be right to refinance your personal loan. Let’s take a look at the types of situations in which you may want to wait:
You Could End Up With A Higher Rate
If you refinance while rates are high, you could end up paying more over the length of your repayment term. Before you decide to refinance, check your lender’s current rates. If they’re higher than when you got your current loan, you might want to wait.
You Currently Have Poor Credit
Refinancing with a low credit score could affect the interest rate you receive. You may want to consider boosting your credit score by not missing payments, catching up on past-due accounts, paying down revolving account balances (such as a credit card) and limiting the amount of credit you apply for.
Your Lender Would Charge You A Prepayment Penalty
It’s a good idea to check whether your lender charges a prepayment penalty, a fee incurred if you choose to pay off your loan early. If your lender does, find out when and if the prepayment penalty expires. Otherwise, you could be charged additional fees for changing the terms of your loan too early. It’s worth noting that even if your current lender charges a prepayment penalty, refinancing may still be worth it – if you can refinance to a low enough rate.
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How To Refinance A Personal Loan
Now that you know who could benefit from refinancing, let’s take a look at how this process works, step by step.
1. Check Your Loan Amount
First, check the exact amount you need to borrow on a new personal loan to pay off your original loan(s).
Verify the total loan amount due as well as other major costs or fees you may incur for paying off your original loan and securing your new loan. For example, you might need to pay origination fees to your new lender.
2. Get A Copy Of Your Credit Report
You can pull your credit report to check over your credit history and current credit score. This report basically functions as a summary of how you handle debt, and lenders will use it to determine your creditworthiness. That’s why it’s a good idea to run your own credit check before applying to ensure you’re eligible for a personal loan.
You’re entitled to a free credit report every year from each of the three major reporting bureaus – Equifax®, Experian™ and TransUnion®. Once you have a copy of your report, check for inaccuracies or out-of-date information. Then, report any errors to the bureau that provided the report.
3. Prequalify For A New Loan
After checking your credit reports for errors, you can prequalify for a new personal loan. This step uses a soft credit pull, which won’t affect your credit score. You will also need to provide some information, such as your name, address, income, Social Security number and birthdate. Once you’re prequalified, your lender will share rates, terms and personal loan amounts with you.
However, some lenders may not offer prequalification, which means you might need to apply for preapproval instead. Getting preapproved involves a hard inquiry, so the lender will need your permission to check your credit. You’ll have to provide the same information required for a prequalification, plus some documentation, like pay stubs, tax returns or W-2s.
4. Compare Lenders and Loan Terms
Compare lenders and loan terms carefully. Banks, credit unions and other lenders may offer different rates. Check for various fees associated with refinancing (such as origination fees) and how you might pay for them over the course of your loan term.
Note that you may want to contact your current lender to renegotiate the terms of your original loan, especially if you’ve enjoyed working with them.
5. Apply for A New Personal Loan
Finally, you’ll need to apply for your new personal loan. You may be required to supply your lender with your bank account information, form of identification, pay stubs, bank statements and more – if you haven’t already been preapproved. At this point, your lender will also run a hard credit inquiry.
Once you have final approval, your lender will then pay off your old loan(s) and you’ll eventually start payments on your new loan.
Pros and Cons Of Refinancing A Personal Loan
If you’re still not sure refinancing your personal loan is the best option for you, review these benefits and drawbacks to learn more.
Pros Of Personal Loan Refinances
Refinancing can be the right choice for many borrowers, and the benefits can include the following:
- One fixed payment: Refinancing can help you pay off multiple loans with one interest rate with one lender. If you want to simplify your payments or consolidate debt, this could be a great benefit.
- Lower interest rate: Replacing your personal loan with a new one could help you secure a lower interest rate, especially if market rates have dropped or you’ve improved your credit score since receiving your first loan.
- Lower monthly payments: Lower monthly payments can help borrowers who need to stick to a stricter budget. If you can get a lower interest rate or a longer repayment term, you can shrink your monthly payment while saving yourself money.
Cons of Personal Loan Refinancing
Weigh the positive and negative factors when refinancing. Some potentially negative impacts of refinancing can include the following (though note that negative impacts might be balanced by the benefits of refinancing):
- Credit score impact: Taking out a personal loan can impact your credit score, especially when your lender does a hard credit pull.
- Extra fees: You may have to pay extra lender fees during the refinancing process, such as origination fees or prepayment penalties.
- Could pay more in interest: If you do opt for a longer loan term, the downside is that you might pay more in interest over the length of the repayment period.
The Bottom Line
When you refinance a personal loan, you get a new loan with new terms and pay it back with interest. It’s a good idea to consider the pros and cons of refinancing a personal loan before you decide it’s an option for you.
To help you determine if a refinance could help you secure a lower interest rate, learn about minimum credit score requirements and how to improve your credit before applying for a personal loan.
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Victoria Araj
Victoria Araj is a Staff Writer for Rocket Companies who has held roles in mortgage banking, public relations and more in her 15-plus years of experience. She has a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.
