Personal loans can help you cover various expenses, from consolidating high-interest debt to funding home improvements. Overtime, you may find that the initial interest rates are too high. It is possible to get better interest rates and lower your monthly payments. All you have to do is refinance your loan. This simply means that you take out a new loan to pay off the old one.

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It’s a relatively straightforward process designed to help you save money and make your payments more manageable. 

We’ll go into how you can refinance your loan, when it’s a good idea, and what factors to consider below.

What is Personal Loan Refinancing?

Personal loan refinancing, also known as loan consolidation, is the process of taking out a new loan to pay off an existing one. The primary goal is to secure more favorable terms, such as a lower interest rate, longer repayment period, or improved loan structure. If you refinance your loan properly, you can reduce your monthly payments, save money on interest, and make your debt more manageable.

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How to Refinance a Personal Loan

  1. Decide if refinancing is right for you: Check your credit score to see if it has improved. See if your existing loan has a prepayment penalty for paying it off early or if the refinanced loan has an origination fee. Fees can easily add up.
  2. Shop around for lenders: Research lenders and compare interest rates, fees, and loan terms to find the best refinancing options.
  3. Pre-qualify before you apply: Pre-qualify for loans that you are interested in so that you can see the repayment terms you’d be offered. Pre-qualifying does not affect your credit score.
  4. Apply for a new loan: Apply for a new loan and accept one with lower interest rates and better terms than your existing loan.
  5. Pay off the old loan: Be sure to pay off the original loan and close the account to avoid additional fees.
  6. Make timely payments: Be diligent about making your new loan payments on time. This will help you maintain a positive payment history and improve your credit score.

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When is Refinancing a Good Idea?

Refinancing a personal loan can be a smart decision in several situations. If your credit score has improved since you initially took out the loan you may be able to qualify for better terms and a lower interest rates. Any time you can secure a loan with a lower interest rate through refinancing it is a good idea since it will save you money over the life of the loan. If you have multiple high-interest loans or credit card debt, consolidating them into a single personal loan with a lower interest rate can simplify your finances and reduce your monthly payments. If you need to lower your monthly payments then you can refinance and choose a plan that will put less strain on your budget. Lastly, you may want to switch to a fixed interest rate that will not go up during the life of the loan.

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When Should You Wait to Refinance a Personal Loan?

While refinancing can offer many benefits, it’s not always the right move. If your current loan has hefty prepayment penalties, refinancing might not be cost-effective. Calculate the total cost of refinancing, including any penalties, to determine if it’s worth it. If your credit score has gone down since you took out the loan, you may not qualify for better terms, and refinancing could result in higher interest rates. Also, if your income has decreased it may be better to wait until your situation improves.

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Does Refinancing Affect Your Credit?

Refinancing a personal loan can have both positive and negative effects on your credit score. Initially, the lender will conduct a hard inquiry on your credit report, which can cause a slight dip in your score. However, if you manage the new loan responsibly by making on-time payments, your credit score can gradually improve over time. The positive payment history can outweigh the temporary negative impact of the hard inquiry.

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The Bottom Line

Personal loan refinancing can be a powerful tool for improving your financial situation. You can secure better loan terms and manage your debt more effectively. But before you decide this is the way to go, assess your current loan, shop around for the best offers, and consider your financial factors like your credit score and income before refinancing. It is not the best option for everyone or every situation. When done strategically, refinancing can save you money on interest and help you manage your loan payments.

Want to get out of debt fast? Read How to Get Out of Debt: 7 Tips That Work and accelerate your debt-free journey.

About the author

Rachel Alulis

Rachel Alulis has been the lead editor for Moneyfor’s credit cards team since 2015 and for the financial rewards team since 2023. Before joining Moneyfor, Rachel worked at USA Today and the Des Moines Register. She then established a successful freelance writing and editing business specializing in personal finance. Rachel holds a bachelor’s degree in journalism and an MBA.