Can You Refinance a Personal Loan? [2024’s Guide]

Are you wondering can you refinance a personal loan?

If you’re considering your financial options to find the best solution to save money or take the edge off your monthly payments, refinancing may be the way to go.

Keep reading to find out what personal loan refinancing is, whether it’s a good idea, some pros and cons, and how to apply. After reading this article, you’ll be able to decide whether it’s the right option for you and take the necessary steps.

Let’s dive in!

Can You Refinance a Personal Loan?

If you want to pay off your existing loan, you can take a refinancing loan from your current lender or another lender that provides this type of loan to replace the previous one.

Depending on your credit score, financial situation, the terms of the loan, and your goals, you can replace your existing loan with one a shorter term and lower interest rate, or even one with a longer term to downsize your monthly payment.

After receiving the funds, you can pay off the loan amount you owe and continue with regular monthly payments for the new loan with new terms, interest rates, and repayment timeline.

In addition to what does refinancing a loan means, it’s important to understand when it’s a good option and what it can be used for. You need to carefully weigh your options and consider various factors before making the final decision.

When Is Refinancing a Personal Loan a Good Idea?

There are situations when you can use a refinancing loan to save money in the long run or gain more flexibility within your budget, depending on your financial needs and possibilities.

Here’s when refinancing is a good idea:

• Your Credit Score Has Improved

If you’ve taken one of the personal loans intended for users with bad credit, you probably have a higher interest rate and less favorable terms due to your credit score.

However, if your credit score changes for the better, getting a refinancing loan with better terms may help you save money in the long run.

• You Need Lower Monthly Payments

In case your monthly budget decreases, you may wonder: Can I refinance a personal loan with one with a lower monthly payment? And the answer is yes—if you’re approved for a refinancing loan with a longer repayment timeline, you’ll have lower monthly payments and more flexibility.

• You Want to Avoid a Balloon Payment

With some personal loans, you may be required to make a larger payment at the end of the repayment timeline, known as a balloon payment.

Refinancing such loans may spare you this additional cost.

• You Want to Pay Off the Loan Faster

On the other hand, if your income increases enough to afford a bigger monthly payment, you can refinance a personal loan with one with a shorter term to pay off your debt faster.

With a reduced number of payments, your overall interest cost will also be lower.

• You Want to Switch to Fixed-Rate Terms

If you have a personal loan with variable terms, not knowing the amount of your monthly payment can be stressful. Getting a refinancing loan with fixed terms can make your expenses more predictable and not subject to rising trends.

Pros and Cons of Refinancing a Personal Loan

When determining your best solution, it’s important to consider both the upsides and what to keep an eye on.

The pros of refinancing loans include:

• Better Loan Terms

If you’ve managed to fix your credit score after taking your existing loan, chances are you can get better terms with a refinancing loan that will consider your current situation and debt-to-income ratio, lowering the interest rate and the overall cost of your loan.

• Getting Out of Debt Faster

In case you can refinance a personal loan with one with shorter terms, you’ll pay off your debt faster and cut down your interest costs.

• Budget Relief

If you’re having trouble making your minimum loan payment due to a decreased income, refinancing can help you extend your repayment time and lower your monthly payment, but this usually results in an overall higher cost of the loan.

However, when deciding, make sure to consider the cons as well:

• Additional Fees

Some lenders may include origination fees and other costs for refinancing loans, so count that in the overall summary when determining your preferred option.

When wondering should I refinance a personal loan, make sure the overall amount you end up with after all the expenses is enough to cover your previous loan, and check whether your previous loan has a prepayment penalty you’ll have to pay in case you pay off your loan early.

• The Possibility of More Interest Cost

If your refinancing loan doesn’t come with better terms and a lower interest rate, but a longer repayment period, you might end up paying more in interest costs.

In this case, you can try to negotiate your loan terms with your lender. You might get a temporary monthly payment pause or redefine the terms of repaying your debt.

• The Effect on Your Credit Score

Does refinancing a personal loan hurt your credit? Although every new inquiry will have a short-term influence on your credit score, refinancing can have a positive effect on your credit score in the long run by reducing your debt-to-income ratio and the amount of debt in some cases.

Nevertheless, you should avoid timing this loan together with financial plans that can be negatively influenced by a bad credit score, like purchasing a car or finding a new landlord.

• The Non-Financial Cost

Along with money, time is one of the most valuable resources, so before deciding whether it’s worth it, consider how long it takes to research what’s necessary to pre-qualify, compare offers, and apply for a refinancing loan, as well as the time necessary to repay it.

How to Refinance a Personal Loan

Once you decide that getting a new loan to pay off the previous one is a good option for you, the following steps will guide you through the process:

• Decide How Much Money You Need

Depending on your circumstances, carefully determine the amount of money you need from your refinancing loan.

Make sure to include the amount of your debt, additional fees, and prepayment penalties, but also any extra funds you may need to cover all the expenses.

• Check Your Credit Score

Can you refinance personal loans depends on your financial health, so checking your credit score before applying will help you determine whether you qualify for better terms compared to your current loan and is applying worth it.

You can request a free credit report annually from one of the three major credit bureaus (Experian, TransUnion, or Equifax), but you can also check if your credit card issuer offers clients this service.

• Shop and Compare the Options

Lenders may come out with different offers for refinancing loans, so make sure to do your research.

Can you refinance a personal loan with the same bank? Although this can be an option depending on the bank policy, it’s not necessarily the best one.

The general advice is to pre-qualify with different lenders, but make sure to compare offers with your current lender to find the best terms.

The prequalification process doesn’t guarantee you’ll get a loan, but it can help you get an idea of the terms you qualify for before entering the application process that could affect your credit score.

• Apply for a New Loan

Once you choose the lender with the top personal loan option for you, you should undergo an official application process and provide all the documentation required.

The application process usually requires your social security number, bank statements, tax documentation, and more.

If you’re wondering how soon can you refinance a personal loan after your application is approved, the lender will usually transfer funds within days. If you need money fast, you can check out some of the personal loans with fast approval and funding.

• Close Your Existing Loan

When you receive funds, you should immediately pay off your previous loan to avoid additional interest costs. Some lenders may even transfer funds directly to close the existing loan, but in some cases, it will be up to you.

• Start Repaying off the New Loan

Once you have the funds, make sure to make regular monthly payments for your new loan according to the agreed terms to build your credit score and avoid any penalties, or set up automatic payments.

Key Takeaways

Conclusion

Understanding what does it mean to refinance a personal loan, but also when it’s a good idea to get one, will provide you with the framework you need to make the right choice for you.

Apply the steps provided in this article to check whether you qualify for better loan terms, and pay off your previous loan using one with a lower interest rate.

The pros and cons explained will help you determine whether the application is worth the hassle and if you can save money and get out of debt faster or if the additional fees make the new loan less appropriate.