When and How to Refinance a Personal Loan
A personal loan refinance involves taking out a new loan and using that money to pay off your existing debt. You can sometimes do this directly with your original lender, or you may want to work with a new lender. In either case, refinancing may help you save money or lower your monthly payments.
In This Article
- What Does It Mean to Refinance a Personal Loan?
- When Does It Make Sense to Refinance a Personal Loan?
- How to Refinance a Personal Loan
- Pros and Cons
Refinancing a personal loan means you’re paying off an existing loan using a new one that has more favorable terms, like a lower interest rate or monthly payment. Although you’re applying for a new loan, it doesn’t technically mean you’re taking on more debt—in fact, refinancing may actually help decrease debt more quickly.
Many people choose to refinance once they can qualify for a lower interest rate, which can lead to saving money. Others may want to make a change to their loan terms—like lowering the monthly payment amount. There are a few circumstances that could make these changes possible.
1. Your creditworthiness has improved.
Personal loans are often unsecured loans, meaning you’re not using a car, home, or other personal asset as collateral. Because of this, your creditworthiness can be especially important in determining your eligibility and interest rate. If your credit history, credit score, or debt-to-income ratio has improved since you first took out a loan, you may want to consider refinancing.
2. Interest rates have dropped.
Lenders may offer lower or higher rates based on changing benchmark interest rates and competition in the market. Even if your creditworthiness hasn’t improved since you first took out a loan, you might still qualify for a lower rate today. If you’re curious, LendingClub lets you quickly check your rate without impacting your credit.
3. There’s an opportunity for a fixed interest rate.
If your current loan has a variable interest rate and you’re worried that it will increase in the future, refinancing with a fixed rate personal loan can help alleviate that stress. By locking in a fixed interest rate for the lifetime of the loan, you may gain more control overyour budget and overall financial goals.
4. You can afford a larger monthly payment.
You may also be able to qualify for a lower interest rate by taking out a new loan with a shorter term. Your monthly payment will increase as a result, but if you can afford the payment, it might save you money in the long term.
5. You need lower monthly payments.
Conversely, if you’re having trouble affording your current monthly payment, refinancing your personal loan with a new one with a longer repayment term could help. The longer term would allow for lower monthly payments, so though you may wind up paying more overall interest, it could be a worthy tradeoff if you need the money for other bills now.
Getting approved for a personal loan refinance will depend on your financial situation and the lenders. But you can generally refinance by following these steps.
1. Estimate how much money you need.
First, look up how much you owe on your current personal loan. Then, check if your current lender charges any prepayment penalties or fees, as that will affect the total amount needed for payoff. Add both of these numbers to get your estimate.
Or, if you want to refinance more than one loan, add up their total combined amount (including potential penalties or fees). Refinancing multiple loans is also called debt consolidation, as you’re essentially combining multiple loans into one. In some cases it makes sense to take out one personal loan and use those funds to pay off other personal loans, credit cards, and high-interest debts all at once.
2. Check your credit.
You may also want to check your credit score to see if you’re likely to qualify for a new personal loan with a more favorable interest rate. Having excellent credit—a score above 750—is ideal. However, you loan options may still be available even if your credit scores are in the fair or good ranges.
When checking your credit report, review them closely for any errors. If you find any, file a dispute with one of the three major credit bureaus immediately, as they can affect your credit score. Your scores may increase after the erroneous negative marks are corrected or taken off your credit reports. ^1^
3. Compare personal loan refinance rates and fees.
Many lenders let you precheck your loan offers before applying. This gives you the opportunity to review the estimated loan amounts, interest rates, loan terms, and origination fees to see if refinancing your debt(s) makes sense. If possible, opt for lenders who, like LendingClub, don’t charge a prepayment penalty or exit fee in the case you need to refinance your debt in the future.
Keep in mind, the origination fee may be subtracted from the loan disbursement. For example, if you take out a $10,000 loan with a 3% origination fee ($300), you will receive $9,700. With this in mind, consider how much you’ll need to borrow to refinance or consolidate your debts.
4. Find the right online lender and apply.
You can use a personal loan calculator to help figure out which loan offer is best for your current financials. Once you make a decision, you can submit an application with the lender.
Even if you received loan estimates before applying, review your official loan offer closely, as the number or terms may be different, especially if there’s been a significant change in your creditworthiness. LendingClub’s loan offers include your loan’s annual percentage rate (APR), loan amount, term, and origination fee—making it easy to understand and compare them.
5. Pay off your other loan(s).
Your new personal loan will generally be sent to your bank account. From there, you’ll need to use those funds to pay off your other loan(s) to complete the refinancing. In the meantime, continue paying your other bills as usual until you’ve received confirmation that the debt is paid off.
Refinancing a personal loan isn’t always a good idea, primarily because there’s no guarantee that the terms on your new loan will be better than your existing loan terms. Here are a few pros and cons to consider:
|You can save money by lowering your interest rate.||Only helpful if you can qualify for more favorable terms.|
|You can potentially lower your monthly payment.||You may have to pay an origination fee.|
|A fixed-rate loan locks in your rate.||Some loans may have prepayment penalties.|
1. Can you refinance a personal loan?
You can refinance a personal loan by taking out a new loan and using it to pay off the existing one. It could be a good idea if you qualify for a lower interest rate or monthly payment (or both).
2. How long does it take to refinance a personal loan?
It depends. The approval process for personal loans varies by lender and, once approved, it can take several business days to receive the funds. You’ll then need to use that money to pay off your current loan, which could take a few more days. At LendingClub, you can be approved for a personal loan in 24 hours and receive funds in as little as a few days. ^2,3^
3. Does refinancing a personal loan hurt your credit?
Because you’ll need to apply for and take out a new loan, refinancing a personal loan may cause a small drop in your credit score. But if you take make your payments on time it likely won’t have a long-term negative impact, and paying down your debt faster may increase your score overall. ^1^
4. Can I refinance a personal loan without changing lenders?
Some lenders let current borrowers refinance their loans, but they may come with specific requirements. For example, at LendingClub, you can take out a new loan to pay off a current loan, but the combined balance can’t exceed $40,000, and you need to have made at least three consecutive monthly payments on the existing loan first.
5. What are my personal loan refinance options?
It’s often best to refinance a personal loan with another unsecured personal loan. While you could use a different type of loan, such as a cash-out mortgage refinance, you’d be moving the debt to a secured loan. Doing so could increase the risk of losing your collateral—your home, in this case—in the event of nonrepayment.
You may want to refinance a personal loan to lower your interest rate (and save money) or lower your monthly payment (even if you pay more overall). If you’ve significantly improved your creditworthiness, you may even be able to qualify for a new loan with a lower rate and lower payment—a real win-win.
^1^ Reducing debt and maintaining low credit balances may contribute to an improvement in your credit score, but results are not guaranteed. Individual results vary based on multiple factors, including but not limited to payment history and credit utilization.
^2^ Of all personal loans approved between 1/1/19 - 3/31/19, 72% were approved within 24 hours.
^3^ The time it takes for a loan to be funded is not guaranteed and individual results vary based on multiple factors, including but not limited to investor demand.