How to refinance a personal loan in 7 steps

Refinancing an existing personal loan can help you lower your monthly payment or score a better interest rate. Learn more. (iStock)

Personal loans are excellent options for financing a large purchase, paying off high-interest credit cards, consolidating debt or funding home improvements. As of 2020, almost 43 million Americans carried an average balance of $16,458 in personal loan debt, according to Experian data. 

Refinancing an existing personal loan with a new loan with better rates and terms can lower your monthly payments and provide a little wiggle room in your budget. Let’s look at what you should know to refinance a personal loan. 

Credible makes it easy to compare personal loan rates from various lenders in minutes.

• How to refinance a personal loan in 7 steps
• Pros and cons of refinancing personal loans
• What to consider before refinancing a personal loan
• Does refinancing a personal loan hurt your credit?
• Should you refinance a personal loan?

How to refinance a personal loan in 7 steps

When you refinance a personal loan, you take out a new loan to pay off the original loan. The new loan will ideally have a better interest rate and terms, and fewer fees — otherwise, refinancing may not be worth it. 

If your current personal loan has high monthly payments, refinancing with a new loan that has a longer repayment period can help free up cash and reduce your monthly payment. Just keep in mind that extending the repayment period means you’ll pay more interest over time, and you’ll be in debt longer. 

When the time is right to refinance your personal loan, follow these steps.

1. Determine how much money you need

For personal loans, it’s best to borrow only the exact amount you need. With that in mind, decide what you’ll need the money for — consolidating debt, paying down high-interest loans, home improvements or paying for a big purchase. 

Not sure how much you can save by refinancing your loan? Use a personal loan calculator to get an idea. Just enter the loan amount, interest rate and term to see if refinancing your current loan is worthwhile. 

2. Check your credit

Before you decide to refinance your current personal loan, step back and take a look at your credit. Most lenders do a hard credit check when you apply for a new loan, so a good credit score is important to get the best rates.

Your credit may take a hit when you apply for a refinance, as most lenders do a hard credit pull. Fortunately, the dip is only temporary.

3. Get prequalified

Prequalifying for your new loan gives you the opportunity to see how much you’ll qualify for and what rate and repayment terms you could receive based on your credit. It also gives you the chance to compare loan offers from different lenders so you can evaluate if refinancing is best for you. 

4. Shop around and compare lenders

You can find lenders that provide personal loan refinancing at a local bank, credit union and online. It can take time to shop around, but it’s time well spent if you find a new loan with better rates and terms that can also lower your monthly payment and reduce fees. 

Be sure to include your current lender in your search as you already have a solid relationship to build on, especially if you’ve made all your payments on time every month on your current loan. And you may be eligible for an autopay discount. Approval requirements, interest rates, repayment options, loan amounts and customer service all play a part in choosing the best lender to work with.

With Credible, you can easily compare personal loan rates from various lenders without affecting your credit score.

5. Apply for the loan 

When you apply to refinance your existing loan, you’ll likely need to provide pay stubs, as well as personal information like your address, bank account numbers, Social Security number and employment history. Some lenders may also ask to see previous tax returns. 

Once approved, online lenders may deposit the funds into your account in as little as one business day. Banks and credit unions can take up to one week to deposit your funds, but it’s not uncommon to have them deposited within one to three business days.  

6. Pay off your old loan 

When you refinance a personal loan, some lenders will pay off your original loan for you. Other lenders will transfer the funds into your bank account, then you’ll pay off your original loan. Either way, get a written confirmation from the original lender that your old loan has been closed or check your account to be sure there’s no old balance. 

7. Start paying on your new loan

Once you receive your loan funds, you’ll start making payments on your new loan according to your new terms. It’s not always required, but many lenders prefer that you set up automatic payments from a checking account. 

Pros and cons of refinancing personal loans

Refinancing a personal loan can make sense if you want a lower monthly payment or you’re currently paying high fees. But it can also affect your credit score, so it pays to weigh the advantages and drawbacks first. 

Pros of refinancing personal loans

• Depending on the lender you choose, you might get your money as soon as the next business day.
• You may get the lowest rate if you have good or excellent credit.
• Most personal loans are unsecured, meaning you don’t need collateral to qualify.
• You can either lengthen or shorten the term of your new loan, depending on your needs and budget.
• You can reduce the money you spend on fees.
• You might be able to lower your monthly payment if you refinance into a longer repayment term.
• You can choose a loan with a fixed interest rate over a variable-rate loan, which can make your monthly payments more predictable.

Cons of refinancing personal loans

• APRs can be higher than with secured loans.
• If your credit is poor, you might have a difficult time qualifying.
• Some lenders don’t allow cosigners if you have less-than-stellar credit.
• You might end up paying fees, like origination fees and application fees.
• You might pay a prepayment penalty for paying off your old loan.
• Depending on your lender, it can take up to a week or more to see funds in your bank account.
• Applying can affect your credit, at least temporarily.

What to consider before refinancing a personal loan

If you can qualify for a lower interest rate because you’ve improved your credit or lowered your debt-to-income ratio, refinancing your existing loan may be a good idea. Refinancing can also make room in your budget by lowering your monthly payment. 

But before deciding to refinance your personal loan, there are some things to consider. 

• APR — The annual percentage rate, or APR, is the total yearly cost of borrowing money. It includes both the interest rate and any fees. When refinancing a personal loan, APR is an important consideration.
• Fees — Not all lenders charge fees to refinance a personal loan, but many do. Fees usually cover the costs to process the loan, verify your information and check your credit score. A lender may also charge payment processing fees, late payment fees and prepayment penalties.
• Loan term — A longer loan term may mean a lower monthly payment. On the other hand, a shorter loan term can increase your monthly payment, but you’ll be out of debt sooner. A longer term will also mean you’ll pay more in interest over the life of your loan. If you want a lower monthly payment, you might want to look at a longer loan term when you refinance.
• Monthly payment amount — It’s important to take a hard look at your budget when considering a personal loan refinance. Defaulting on your payments can damage your credit, so you’ll want to be sure your new payments don’t overextend your monthly finances.

When you’re ready to refinance your personal loan, use Credible to compare personal loan rates.

Does refinancing a personal loan hurt your credit?

Refinancing a personal loan can hurt your credit — at least temporarily. To determine the risk of lending you money, lenders do a hard credit pull, which shows up on your credit report. Lenders often only do a soft credit pull to prequalify you for a loan, which doesn’t affect your credit. 

If you've recently applied for additional credit, a lender may question whether you can comfortably take on new debt, so it’s best to put off making any large purchases until after you refinance your existing loan. 

Should you refinance a personal loan?

Refinancing a personal loan may be a good idea in several situations. But other times, it might not be advisable to refinance your loan. 

Here are some situations when refinancing your personal loan could be a good idea:

• Take advantage of low interest rates — If interest rates are lower than when you took out your original loan, refinancing into a lower rate can make sense.
• Pay fewer fees — Many lenders charge fees. Eliminating some (or all) of these fees by refinancing can help lower your monthly payment.
• Shorten or lengthen your term — By shortening the term of your loan, you can get out of debt sooner. By extending the term, you can lower your monthly payment, sometimes significantly.
• Lower your monthly payment — If your current monthly payment exceeds your budget, refinancing your loan may give you some breathing room.

Here are some situations when refinancing your personal loan could be a poor decision:

• Prepayment penalties — Some lenders charge a prepayment penalty for paying off your loan early.
• Credit keeps you from qualifying — If you have poor credit, you may not qualify for a loan refinance. Work to bring your credit up so you qualify for the best rates.
• You get caught in a cycle of debt — It can be easy to find yourself in a debt cycle where you frequently take on a new loan to pay off another loan.
• Repayment timeline is too long — By extending your debt timeline, you could end up paying a lot more in interest.