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Refinancing Personal Loans: How & When to Do It

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Kim Franke-Folstad

Kim Franke-Folstad

Updated August 3, 2021
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Refinancing Personal Loans: How & When To Do It; Looking to refinance your personal loan? Learn about your options and how refinancing a loan affects the loan and your financial standing.
If you’re one of the nearly 20 million US consumers making payments on a personal loan, you might be wondering if this is the right time to look at refinancing. Maybe you’ve noticed that the interest rates that are being advertised are significantly lower than what you’re currently paying. Or perhaps your credit score has improved since you applied for the loan you have now, and you think you could qualify for a better rate. Or maybe you’re hoping to reduce the amount of your monthly payments and/or the number of payments you have left to make.It makes sense to check out what various lenders are offering if you think you could get better terms or save money by refinancing your loan. But as with any financial decision, it’s important to understand the risks and benefits of refinancing, to look carefully at what you might be signing up for, and to take the proper steps to ensure that you’re getting the best loan for your situation.

How Does Personal Loan Refinancing Work?

When you refinance a personal loan, you’re applying for and signing for a completely new loan. You’ll use the new loan to pay off your previous loan, and then make payments on the new loan based on the new terms you’ve been given. You can refinance through your old lender, but it’s a good idea to look at what other lenders have to offer, too.It’s easy to shop around for the terms that best fit your needs: Many lenders post their loan options on their websites or you can use a website that compares lenders’ best rates and other terms. With Lantern Credit by SoFi, for example, you can answer a few questions about yourself and the loan you need and then compare loan options from a network of lenders.

How Do You Refinance a Personal Loan?

There are a few steps you can take to better your chances of finding a loan with terms that suit you.

Checking Your Current Credit Standing

Before you start shopping for a refinance loan, you may want to review your credit standing. Otherwise, you might see a great interest rate quoted but then be disappointed when you learn your credit isn’t up to the standards required for that rate.Each lender has its own guidelines for determining an applicant’s overall creditworthiness. But you can expect a review of your credit scores and credit history to be part of the loan approval process. The higher your score, typically, the better the chances are that you’ll get more favorable terms. You may be able to see your credit score at no cost from your online credit card or banking statement, or by using your financial institution’s app. You can get a free weekly credit report from the three main credit bureaus (Equifax, TransUnion, and Experian) through April 2022 at AnnualCreditReport.com. (You can always get your free credit report annually from AnnualCreditReport.com.) When you get your reports, you can check to be sure the information is up to date and accurate. If your credit isn’t where you want it to be, you may want to press pause on applying for a loan and work on increasing your scores. There are many factors that affect your credit scores, and they will differ from person to person, so there are many different options to consider. It might mean doing a better job of paying your bills on time, which is the factor that’s weighed most heavily in your FICO Score®. Or you may want to look at nudging your “credit utilization rate” down below 30% before you apply. (Your credit utilization rate is the amount of revolving credit you’re currently using divided by the amount of credit you have available.) If you’re looking for a loan because you want to grow your small business, and you need the money quickly, you may want to investigate the options for bad credit business loans and financing, which can involve other factors aside from your personal credit score. Only you will know what’s right for your personal situation, but it’s always a good idea to speak to a professional if you have questions. 

Shopping Around for the Best Rates and Terms

If you’ve ever shopped for anything online, you know there are a lot of companies out there vying for your business. It’s the same with refinancing a personal loan: You can easily compare rates and terms from multiple lenders online or by querying other financial institutions.You may not qualify for the lowest rates you see advertised. As those rates are typically for borrowers with exceptional credit as defined by FICO. But many lenders will prequalify potential customers who want to see what type of loan they can get without undergoing the type of hard credit check that may temporarily impact a credit score. It also may help to use one of the personal loan calculators offered on financial websites. Or you might choose to use a loan comparison site to assess how your existing loan measures up against other loans that are now available.Refinancing to a lower interest rate can save you money and make it easier to pay your debt sooner—so looking at rates can be a good place to start. But while you’re shopping, watch out for hidden costs that could affect your bottom line, including origination fees, closing costs, or prepayment penalties. Keep in mind that if you’re paying more in fees or extending the length of the new loan to get a lower monthly payment, you could end up paying more in interest over the life of the loan. If your current loan has a hefty prepayment penalty, you may want to take that amount into consideration, too, as you decide whether refinancing makes sense.

Applying for the New Loan

Once you’ve found a lender and a loan that suits your needs, you can submit an application.This process is pretty much the same as it would be if you were applying for any loan. That means you’ll need to provide some information to verify your identity and income. Lenders may have different requirements, but typically you’ll be asked for your: 
  • Social Security number
  • Two forms of ID (your driver’s license number or some other state-issued identification, a US passport, a birth certificate, etc.)
  • Recent pay stubs
  • Employer’s name, address, and contact information
  • Recent bank statements
  • Recent tax returns
  • Proof of address (a utility bill, etc.)
  • If you’re self-employed, you may be asked for additional documentation about your income
When you formally apply for your loan, the lender will do a hard credit pull, which may temporarily adversely affect your credit score (typically for less than a year, though the pull will remain on your credit report for two years). So do your due diligence and read all the fine print to be sure you’re getting exactly what you expect. You may have to wait a few days to find out if you’ve been approved. If everything looks good, you can sign your name and look forward to receiving your money in a few days to a few weeks, depending on the lender.

Say Goodbye to that Old Loan

Typically borrowers receive a lump sum from the new lender and are expected to pay off the old loan. Make a plan to do this as soon as possible if you want to avoid making double loan payments and accruing unnecessary interest. If you have a budget and/or a bill-paying schedule, don’t forget to make adjustments for the new loan payments.

When Can It Be a Good Idea to Refinance a Personal Loan?

If you think you can save money or make your payments more manageable by refinancing your unsecured personal loan, it’s probably worth checking into what’s available. There’s no point in refinancing if the new loan doesn’t come with better rates, terms, or benefits than your previous loan. Here are some examples of when refinancing might make sense:

When You Can Get a Better Rate and Terms

One of the more common reasons to refinance is if you can find a lower interest rate than you have on your original loan. Also, because unsecured personal loans are becoming increasingly popular with consumers, you may find the market is more competitive now than it was when you got your original loan.According to recent data from the Federal Reserve (April 2021), the average interest rate on a two-year personal loan is 9.46%. However, interest rates and other loan options can vary substantially, depending on your creditworthiness and the lender you choose. Remember: Finding a low interest rate can be a beautiful thing, but it doesn’t necessarily mean that low-rate loan is the best deal for you. Some lenders offer additional perks meant to appeal to borrowers—from quicker approvals to low or no fees to unemployment protection. Know your goals before you shop, and try to gauge each lender’s commitment to customer service before you actually apply for a loan. Comparison sites can help you break down what different lenders have to offer. 

If Your Credit Score Has Improved

It’s always a good idea to track your credit score and know what’s on your credit reports. But it’s especially important when you’re thinking about refinancing. If your credit score has improved since you got your original loan, you may now qualify for a better interest rate. So if you’ve been consistently paying bills on time and/or paying down credit card debt, this could be a good opportunity to see if a new loan would be a smart financial move. 

When You Want to Pay Off Your Loan Sooner

Refinancing isn’t always about getting a lower monthly payment. If you can afford to make larger monthly payments, you may want to consider refinancing to a shorter loan term, which can end up saving you money in interest. (You might want to review your household budget before refinancing to a larger monthly amount, just to be sure you’ll be able to handle the payments if an unexpected expense comes up. Using a personal loan calculator can help you get an idea of what this might look like.) 

When You Want a Different Rate Type

If your original loan has a variable APR and you’re nervous about what could happen if interest rates go up in the future, you may want to refinance to a fixed-rate loan instead. Principal and interest payments don’t typically change with a fixed-rate loan. And a fixed rate can make it easier to plan your monthly payments and fit them into a budget. 

When You Can’t Afford Your Monthly Payment

If you took on your original loan payment based on circumstances that have since changed (maybe you’ve had your work hours or pay rate reduced), you might choose to refinance in order to reduce your monthly charge. If your new refinance loan has a lower rate but the same length as your original loan, you may have marginally lower monthly payments. Or, if necessary, you could consider refinancing your current loan to a longer repayment period to get smaller payments. This last move may not be a money saver. You’ll likely increase the total amount of interest you pay over time. But it could give you some financial flexibility while times are tight. And many lenders allow you to put more toward your monthly payment whenever possible without penalties.

When the Original Loan Was Jointly Held

If your original loan was jointly held and you want to take over the loan on your own, you may want to make it official by refinancing into a loan that’s in your name only. (Maybe you’re splitting debts in a divorce, for example, or you no longer need a parent or partner to help you get a loan or make the payments.)  

If You Have Debts You Want to Consolidate

If you have credit card debt and a personal loan, refinancing could allow you to consolidate those bills into a single payment. This might make it easier to get a handle on your debt—if you can get in the habit of paying off your credit cards every month, that is, and avoid carrying a balance.

If Adding a Cosigner Would Improve Your Loan Terms

If you’ve found a cosigner (or co-borrower, as required by some lenders) who could improve your chances of getting a better interest rate, it might be worth checking out what’s available from different lenders. Just be aware that if you fail to make timely payments on the refinanced loan, it could affect that person’s credit score as well as your own.

Pros and Cons of Refinancing a Personal Loan

When you’re deciding whether to refinance a personal loan, it can help to take a step back and look at the pros and cons of how this move would fit into your overall financial goals.

Pros of Refinancing a Personal Loan

You may be able to:
  • Find a Better Interest Rate: If your creditworthiness has improved or interest rates have dropped, a lower rate may be available when you refinance. And a lower rate can save you money on interest over the life of your loan.
  • Adjust Your Paying Schedule: A new loan length may be a better fit for your current needs and goals. (You could get a shorter payment term with higher payments, for example, or a longer payment term with lower payments.)
  • Move to a New Rate Type: If your variable-rate loan makes you nervous or you want more consistent payments, you could change to a fixed-rate loan.

Cons of Refinancing a Personal Loan

You might have to:
  • Pay Extra Fees or Penalties. You may face some unexpected costs as you end one loan and start another. You might have to pay a prepayment penalty to your old lender if you refinance. Or your new lender may charge an origination fee to cover administrative costs. These and other potential fees can add to the cost of refinancing.
  • Spend Time Researching and Applying for a Refinance Loan. Despite online comparison sites and lenders that offer clear information (and quick prequalifications) on their websites, shopping for a new loan can still be painful. It can take some time to sit down and do the work, and you may still not get the rates and terms you want.  
  • Take a Hit to Your Credit Score. Most lenders require a hard credit inquiry during the application process, which could cause your credit score to dip temporarily. See below for more about how this could impact not just your score, but your credit history. 

Can Refinancing Hurt Your Credit History?

When you’re shopping for a new loan, lenders typically do a soft credit pull during the prequalification process, and that shouldn’t have any effect on your credit.Once you’ve decided to apply for a specific loan, however, you can expect that lender to do a more thorough credit check before potentially giving its approval. That hard credit pull may cause a small drop in your credit score (just as it would if you applied for a credit card or some other type of loan.)If you’re planning to take out a mortgage or an auto loan soon, for example, you may want to put off refinancing your personal loan. But otherwise, as long as you stay on track with your bills and keep your credit under control going forward, the dip should be small and short-lived.

How Soon Can You Refinance a Personal Loan?

You can refinance a personal loan at any time, but it probably isn’t worth the bother unless you have reason to believe you can benefit from replacing your old loan with a new one. 

The Takeaway

Personal loan refinancing may be worth exploring if you think it will put you in a better position financially. If your credit score has improved since you got your original loan or if the rates you see advertised seem significantly better than what you’re paying, you may want to look at refinancing. But it’s important to do an apples-to-apples comparison of any loans you’re considering—and between your current unsecured personal loan and the new loan offer you think is best. A comparison site like Lantern by SoFi can help make it easier for you to assess competitive loan options from a network of lenders.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC0421052

Frequently Asked Questions

Is it good to refinance a personal loan?
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About the Author

Kim Franke-Folstad

Kim Franke-Folstad

Kim Franke-Folstad is an award-winning journalist with 30 years of experience writing and editing for newspapers, magazines and websites. Her work for SoFi covers a range of topics related to personal finance, including budgeting, saving, borrowing, and investing.
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