personal loans

When and How To Refinance a Personal Loan

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Don TaylorDear Personal Loan Adviser,
We -- my wife and I -- took out a personal loan last year to consolidate our credit card debt. It's working for us. We can handle the 1 monthly bill. We're paying down the personal loan and expect to be debt free, except for our mortgage and car loans, when the personal loan is paid off.

It's been a struggle not carrying a balance on our credit cards, but we're staying current on the cards.

What's the problem? No problem really, I just want to know if I can refinance our personal loan to get a lower interest rate.
-- Tommy Turnaround

Wife and husband working on budget together | Geber86/Getty Images

Geber86/Getty Images

Dear Tommy,
Congratulations to you and your wife for getting your debt under control. Once you put the debt consolidation plan in place, it was key to stay current on your credit cards. Nice work.

RATE SEARCH: If you're ready to take out a personal loan, check out the rates at today.

You can refinance a personal loan. It can make sense if your credit score has improved enough that you'll be offered enough of a lower rate to compensate for any loan origination fees and costs associated with the loan.

No prepayment penalty

The typical personal loan doesn't have a prepayment penalty, taking away 1 roadblock to refinancing. Peer-to-peer lenders will let you shop for rates on a loan, without it impacting your credit score until you actually close on the new loan.

One issue in refinancing is the temptation to extend the maturity of the new loan out past the maturity of the current loan. Then, even if you get a lower interest rate, you can end up paying more in total interest expense.

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Does refinancing make sense?

You can use Bankrate's mortgage refinancing break-even calculator to see if it makes sense to refinance your personal loan. Just input the tax rate as 0%, list points paid as 0 and check the box to not include any private mortgage insurance, or PMI. Input any closing costs like a loan origination fee into the line "other closing costs." It's not pretty, but you can make it work.

Write back and let me know if the refinancing worked for you.

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