When and how to refinance a personal loan

6 min read

Taking out a personal loan to consolidate your debt or pay for a major expense can go a long way toward helping with your finances and getting you debt-free. However, once you’ve taken out a personal loan and you’re making the required payments on time, you may start to wonder about refinancing the loan. Is refinancing your personal loan to get a lower interest rate possible? And is it worth it?

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Yes, refinancing a personal loan is not only possible, it can also be a good idea. It makes sense if your credit score has improved to a level where you’ll be offered enough of a rate reduction to compensate for any loan origination fees and costs associated with the loan.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

When does refinancing a personal loan make sense?

  • You have a better credit score: One of the best ways to qualify for a lower interest rate on your personal loan is by improving your credit score. If your score has seen a jump since you initially took out your loan, this could be a good reason to refinance.
  • You want to switch your rate type: Having a variable APR on a personal loan makes it difficult to plan for your monthly payments. Not only that, you might see an upward trend that ends up costing you more. By refinancing, you can switch from a variable to a fixed rate so you can enjoy consistent payment amounts each month.
  • You want to avoid a balloon payment: Some personal loans may come with a balloon payment, requiring you to make a much larger payment than the normal monthly amount. You can refinance ahead of time to avoid this style of personal loan.

How to refinance a personal loan

1. Figure out how much money you need.

What does refinancing a loan mean? In short, you’re basically paying off the existing loan with a new one that has different terms. So before you shop for quotes, find out the exact amount of money to pay off your current loan. You can find that information by logging into your account or directly calling your lender. Also ask if there are any prepayment penalties that might outweigh the benefits of refinancing.

2. Check your credit score and report so you know whether your credit is good enough for a low rate.

Before you consider refinancing your loan, you’ll need to know whether you qualify for a lower rate than what you’re currently paying. If the new interest rate isn’t significantly lower, it may not be worth it to refinance. Furthermore, check to see if lenders do a soft pull or hard pull to quote you an offer. Alternatively, check your own credit score to get an idea of whether or not it has improved.

3. Shop for rates and terms at banks and online lenders.

Research is key when you need to refinance personal loans. It’s worth it to see what different banks and online lenders offer and what their requirements are. A new loan with a lower interest rate isn’t necessarily better if you’re paying it off for a longer time.

One issue with refinancing is the temptation to extend the maturity of the new loan 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 expenses. Pull out a calculator and do the math for any rate offered. What will be your total payment at the end of the loan?

4. Ask the lender whether inquiring about the loan’s interest rate will affect your credit score.

Peer-to-peer lenders will let you shop for rates on a loan without it affecting your credit score until you actually close on the new loan. Once you do close on a new loan, however, your credit score can take a small hit. Usually it amounts to five to 10 points. The dip in your credit score is temporary, only lasting one year. The inquiry itself is listed on your credit report for two years, but doesn’t hurt your score the entire time.

5. Compare refinance rates

Finally, compare refinance rates and take notes for every rate presented. Make a quick chart to compare key features and interest rates. Then, based on your chart, your research and your discussions with the lender, decide what’s best for you.

6. Contact the lender once you choose one with favorable rates and requirements.

If you like the choices your lender offers, contact them to discuss the rates further. There’s a lot of fine print, and you want to make sure your lender guides you through it all. Before making a final decision, have them provide the pros and cons of each rate. Also read your loan agreement carefully before you sign anything.

How refinancing a personal loan affects your credit score

When you refinance, you’ll have to go through a new credit check again. This can lower your credit score slightly. However, if you qualify for a lower interest rate, it does mean you get to pay off the loan faster. So, a small, temporary hit to your credit score may not matter in the long run.

On the other hand, a small hit could hurt you if it’s at a time when you’re moving and need to rent or buy a place. Landlords do check your credit score and refinancing your loan at the wrong time could make it difficult to find housing. Also, if you need to buy a new car, you’ll need a good credit score if you plan on making monthly car payments.

Advantages of refinancing a personal loan

  • Better interest rate: Not only could an improved credit score help you get a better interest rate on a new loan, you might benefit from lower rates in general.
  • Pay off your loan faster: When you’re comfortable making higher monthly payments and you want to get out of debt faster, you can refinance a personal loan to actually get a shorter term. Not only does this help you make fewer interest payments, you might even get a lower rate from the lender.
  • Extend your repayment period: Extending your loan repayment can help your monthly payments feel more manageable if you’re having difficulty making them on time. On the plus side, you’ll lower your monthly payment by drawing out the term length. But on the down side, you’ll also pay more in interest to your lender.

Disadvantages of refinancing a personal loan

  • You might pay extra fees: Anytime you take out a new loan, you might have to pay additional lender fees, which can cut into the money-saving benefits you may be trying to achieve. Be sure you understand everything involved with your personal loan refinance so you make the best financial decision.
  • You might have a prepayment penalty: Some loans come with a prepayment penalty when you pay off the balance before the term ends. Since refinancing requires that you pay off the existing loan replace it with another, make sure this feature won’t hurt you too much.
  • You might pay more in interest: Extending any loan period usually makes you pay more in interest over time. If you’re trying to lower your monthly payment because of financial difficulties, you might still consider refinancing. Just understand that the lower monthly payment probably isn’t saving you money in the long run.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

The bottom line

If you’re looking to refinance personal loans, it’s important to do thorough research. Find out when to refinance your loan, if you’ll get a lower interest rate, how to do so and what the pros and cons are. Once you’ve schooled yourself on the details and talked to lenders, you can see the big picture and determine whether refinancing makes sense.

Bankrate’s content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate’s Terms of Use.

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