4 potential benefits of refinancing a personal loan

If you currently have a personal loan, refinancing could be a smart way to improve your financial situation. A personal loan refinance simply means you replace your current personal loan with a new one, ideally with better terms that can help you save money.

A refinance could be a chance to get a lower interest rate on a new personal loan, which could save you money on interest in the long run. Or you might be able to get a lower monthly payment that better fits your budget.

Whether you're looking for some breathing room in your monthly budget, or you want to pay off your loan faster, refinancing a personal loan could be the right move. Here are some potential personal loan refinance benefits and why you might consider taking this step to improve your personal finances.

1. Refinancing could lower your interest rate

You might be able to refinance to a new personal loan with a lower rate if your credit score has improved since you originally borrowed, or if personal loan rates have dropped.

Personal loans usually offer the advantage of a fixed interest rate, meaning the rate stays the same for the life of the loan. That could make it easier to budget, since your monthly payments won't change. But if you’re locked in to paying a higher rate than what you could get now, refinancing at a lower rate could be a good choice.

A lower rate could reduce your loan costs. The amount you save would depend on how much of the loan principal you've already paid down, the fees to get the loan, and how long it will take for you to pay off what you owe on the new loan.

You could also refinance from a variable rate to a fixed rate if you want predictable payments. While it's less common to find personal loans with variable rates, they do exist.

Pro tip: You can prequalify through Achieve Personal Loans to get an idea of what rates you might qualify for now. Achieve Personal Loans uses a soft credit check for prequalification, so it won't impact your credit score.

2. You could pay your loan off faster

You might replace your old loan with a new loan that has a shorter term, which could allow you to pay off the debt faster. You could also pay less in interest overall when the loan requires fewer monthly payments.

There's a trade-off, of course. Your monthly payments on the new loan might be higher than what they were with the old one. (Or, if you get a lower interest rate, you might be able to pay off the loan sooner with the same monthly payment you've been making.)

You'll need to make sure your budget can handle the new payment, especially if it's higher. But if you can manage to make the same or bigger payments, shortening your loan term could get you closer to debt freedom in less time.

3. Payments could be more manageable

If you refinance with a longer term or lower interest rate, you could reduce your monthly payments. Lower payments could make repaying the loan easier. But before you commit, understand how the total cost of the loan could change.

If your financial situation has changed since you first took out a loan, you might be looking for some relief with payments. A personal loan refinance could help you get a lower payment and add some breathing room back into your budget.

How does that work? Typically, it means one or both of the following:

• A lower interest rate

• A longer loan term

Use an online loan calculator to figure out what your new payments could be and how much you'll pay in interest if you refinance with a lower rate or longer term.

How refinancing could impact your monthly payment

Here's an example. Assume you owe $15,000 on a personal loan. Your interest rate is 18% and your monthly payment is $381. You have five years left in the repayment term and you want a lower payment.

Now, let's say you refinance to a six-year loan at 8%. Your monthly payment drops to $263. Instead of paying $7,854 in interest, you pay $3,936. The lower rate plus a longer repayment term reduces your monthly payment and total interest costs. It gives you big savings of $118 per monthly payment, and $3,918 on interest.

The key thing to notice here is that you reduced your interest rate and increased your repayment term. The lower interest rate is what saves you money overall. If you only extend your repayment term—without a lower rate—your monthly payment can go down but your total interest cost will likely increase.

For example, let’s assume that instead of getting a new loan at 8%, you keep the 18% rate and just add a year to the repayment term. Instead of paying off $15,000 in five years, you’ll pay it off in six years. In this scenario, your payment goes down to $342 per month (a small decrease) and your interest charges increase to $9,633 (a significant additional cost).

For that reason, unless you can lower your interest rate, refinancing a personal loan might not be a good choice.

4. You might improve your credit

When refinancing makes your loan payments easier to manage, it could help you keep your credit score safe. This might sound a little counterintuitive since applying for personal loan refinancing usually involves a hard credit check. Hard credit pulls can knock a few points off your credit scores.

However, if the new loan terms mean your monthly payment better fits your budget, you could reduce the chances of a late payment. Late or missed payments can do a lot of credit score damage, so anything you can do to avoid them could be a net positive for your credit.

Achieve is not a Credit Repair Organization and does not provide, or offer, services or advice to repair, modify, or improve your credit.

When refinancing a personal loan makes sense

A personal loan refinance could make sense if you need or want different loan terms. You might also consider a refinance if you want to work with a different lender, borrow more, or consolidate other debts. A refinance can even roll multiple balances into a single monthly payment, which could simplify repayment and make it easier to get out of debt.

A refinance isn't the right move in every situation, though. A few signs it may not be the right choice:

• You're already getting close to paying off your current loan.

• The new loan’s interest rate would be higher than the one you have now.

• The fees to refinance would outweigh your savings.

Costs are a key part of math. Some lenders charge an origination fee on the new loan or a prepayment penalty on the old one, so check both before you refinance.

If you want to learn more, our guide to refinancing a personal loan walks through the steps. Review your current loan terms against what a new loan could offer, use a personal loan calculator to crunch the numbers, and you'll be ready to make the call.

When you're ready to explore your options, Achieve Personal Loans could be a good place to start. You can prequalify with no credit score impact, so you can see your estimated rates and start crunching the numbers.

Find out if you qualify through Achieve Personal Loans.