Refinancing a personal loan can be the best option when it saves you money or helps pay off your loan faster. You can refinance by replacing your existing loan with a new one, ideally with lower interest rates, a shorter loan term, less fees, or other benefits that can help you save while you pay off your debt.
Key Takeaways
- Refinance a personal loan by replacing your current loan with a new one that offers better terms—such as a lower interest rate, reduced fees, or a shorter repayment period—to save money or pay off debt faster.
- Refinancing is most beneficial when your financial profile has improved, such as a higher credit score, lower debt-to-income ratio, or the ability to secure lower monthly payments or interest rates.
- Qualifying for a refinance depends on factors like consistent payment history, verifiable income, manageable debt levels, and having your current loan in good standing.
- While refinancing can lower costs and simplify payments, it may also come with fees, potential credit impact, or increased total interest if the new loan terms aren’t favorable.
What Is Refinancing a Personal Loan?
Refinancing a personal loan means paying off your current loan balance with funds from a brand new loan. Refinancing, sometimes called a loan rollover, can be a smart financial move if it saves you money or makes paying off your debts more affordable. However, it’s important to make sure the benefits outweigh any potential drawbacks before you commit and apply for a new loan.
When To Refinance a Personal Loan
When is refinancing the right move? Some green flags indicating a refinance may be the right choice for you are:
- Your Credit Score has Improved — Refinancing with bad credit can be tricky. If your credit score has significantly improved since you received your current loan, you may be able to qualify for lower interest rates or better terms.
- You Want to Pay Off Debt Faster — Refinancing your loan with a shorter repayment period can help you pay off your debt faster, which can help stabilize your credit and save money on interest rates.
- You Want a Lower Monthly Payment — You may also want to refinance your loan to receive more affordable monthly payments.
- You Have High-Interest Debt — If your interest rates are making your loan too expensive, refinancing can help lower your payments if you’re able to secure a better interest rate.
- Your Financial Situation has Improved — If you’ve received a new job, a raise, or have paid off other debts and now have an improved debt-to-income ratio, you may be eligible for a better loan deal.
Refinancing your personal loan will benefit you most if you’re able to secure a loan with lower interest rates, less fees, or more affordable terms.
How To Qualify For a Refinance
Every lender is different, but some some basic eligibility requirements that can help you get approved for a refinance loan include:
- Strong Payment History — This is the most important factor. Lenders want to see that you have a consistent history of making your due payments on time, they’ll probably review your history from the past 6 – 12 months. That includes payments on bills, current loans, and other debts.
- Lower Debt-to-Income (DTI) Ratio — Ideally, you’ll want your income and assets to outweigh your overall debts. Lenders want to know you have the means to pay off your new loan.
- Verifiable Income — You must be able to prove you have a consistent source of income. This can include the paycheck from your job, or certain forms of government-issued funding like disability or unemployment.
- Have a Good Loan Status— The debt you are looking to refinance must be in good standing. That means your loan has a current payment history and the loan is not in a delinquent state.
See how much money you qualify for, check your rates with no initial impact on your credit!
How To Refinance a Personal Loan
How to refinance your personal loan step-by-step:
- Review Your Current Loan — Review the details on your current loan. Pay close attention to your remaining balance, interest rates, prepayment penalties, and other fees.
- Check Your Credit Report — Take a look at your most recent credit report and confirm your credit score is in decent standing. If you notice errors, report them right away, this can help boost your score.
- Compare Lenders and Shop Around — Don’t just go with the first loan offer you find. Review a few lenders, compare offers, and see who can give you the best deal. You may want to also check out online reviews to see what kind of experience other people had with different lenders.
- Review Eligibility Requirements — Once you pick a lender, review their eligibility requirements before you apply. Some lenders have a minimum credit score requirement in order to qualify. In general, eligibility requirements for most lenders include:
- Being 18 years
- Providing proof of identity (via a driver’s license, passport, etc.)
- Showing proof of income (bank statements, paystubs, tax documents)
- Submit an Application — When you’re ready, submit your application. The right lender should be able to give you an approval decision right away.
- Pay Off Your Old Loan — Once approved and you’ve received your funds, go ahead and pay off your old loan. After that all you have to do is start making payments on your new loan like normal.
Pros and Cons of Refinancing a Personal Loan
Before committing to getting a new loan, consider the pros and cons of refinancing first.
Some potential benefits to consider include:
- Lower Interest Rate — Lower rates means saving money overall.
- Lower Monthly Payment — A lower monthly payment can help you to afford your loan and other financial obligations.
- Saving Money Over Time — Via either better rates or a lower monthly payment.
- Simplifying Debt — If you refinance more than one loan, you can take multiple payments and consolidate them into one easy monthly payment.
- Flexible Terms — Changing your terms can improve not only your monthly payment, but the overall cost of your loan as well.
On the other hand, some potential drawbacks to consider are:
- Fees and Costs — Every loan comes with extra costs, such as origination fees. Make sure the additional fees and costs of your new loan don’t outweigh your potential savings.
- Higher Total Interest (sometimes) — If you don’t get the right loan, you could end up with worse rates than before. This is why the research stage is essential!
- Credit Impact — Getting a new loan will cause your credit to dip a bit at first. However, this should stabilize after a few months of making consistent payments and maintaining good financial habits.
- Not Guaranteed Savings — Refinancing isn’t guaranteed to save you money, which is why it’s so important to pay attention to your current and new loan details to make sure it’s worth it.
- Risk of Reborrowing (cycle of debt) — Getting a new loan and possibly more money from refinancing could send you down a cycle of irresponsible spending and borrowing. Be sure to borrow only what you need and what you can afford to repay.
Tips for Success When Refinancing
Check out these helpful tips for setting yourself up for success when refinancing your loan:
- Follow the 2% Rule — To make sure you are actually saving money, try refinancing only if you can get an interest rate that is at least two percentage points lower than your current rate.
- Watch for Fees — Make sure the origination fees and other costs of your loan don’t outweigh your intended savings.
- Don’t Extend Your Term Too Long — While longer loan terms may mean a lower monthly payment, this also means more time for lenders to charge you interest on your loan balance. If you extend your loan terms too long you may end up paying more overall during the life of your loan.
- Consider a Co-signer — A co-signer may help you qualify for lower rates or more affordable loan terms.
A good rule of thumb to follow when refinancing is to look for lower rates and a shorter term. Be careful about lower payments because of a much longer term, as this can result in you paying more for your loan in the long run.
When NOT To Refinance
Refinancing isn’t always the best option. In fact, it can severely hurt your credit and overall finances when you don’t get the right loan or if your finances aren’t ready to refinance.
Some signs that indicate refinancing may not benefit you are:
- Your credit score has dropped
- Origination fees and other fees outweigh your savings
- You’re close to paying off your current loan
- The new rate isn’t significantly lower
A Final Word From CreditNinja About Refinancing Your Loan
Refinancing can be a great choice to help you save money, and pay off debt faster. But, it’s important to consider your options and carefully review your current loan and financial situation before submitting an application.
Have questions about refinancing your loan? Feel free to call CreditNinja at (855-NINJA-01) or email us at [email protected] to talk to our helpful customer service team of loan experts!
