Can you refinance a personal loan?

Looking at your personal loan, you could be wondering if there’s a better deal out there. Refinancing could be your golden ticket to shrinking those payments and freeing up some cash. It's like finding a coupon for your personal loan—who doesn't love a good discount? 

Refinancing a personal loan could free up the extra funds you need to reach a financial goal or enjoy the peace of mind that comes with a little more financial wiggle room. 

Refinancing isn't just about numbers. It's about putting yourself back in the driver's seat with your finances. It's about saying, "I deserve better," and making it happen. 

Taking a step toward a lighter financial load is a smart move. You’ve got this. 

We'll walk you through how to do it. 

What is a personal loan refinance?

Personal loan refinancing means paying off an old personal loan with a new one. 

Here's how it typically works:

• You apply for a personal refinance loan

• You use the new loan money to pay off an existing personal loan

• You make payments to the new loan

Refinancing doesn't erase any debt. But it could make your payments more affordable, particularly if the interest rate is lower, your balance has dropped significantly, or you plan to extend the loan term. 

Benefits of refinancing a personal loan

Refinancing personal loan debt can have advantages. The personal loan benefits you get will depend on why you're refinancing and what the new loan terms are. 

Generally speaking, personal loan refinancing could help you:

• Save on interest. Refinancing to a lower rate could save you money on interest charges if you don’t take longer to pay off the debt. 

• Ease the strain on your budget. Personal loan refinancing could free up cash flow in your budget with a smaller monthly payment compared to what you’re paying now.

• Get rid of debt faster. When you get a lower rate on a loan more of your monthly payment goes to the balance you owe instead of interest (compared to making the same payment on a higher-interest loan). 

• Consolidate debts. If you have more than one personal loan, you could get one refinance loan to consolidate them. Debt consolidation could streamline your budget by reducing the number of monthly payments you make each month. 

If you're thinking about refinancing a personal loan, ask yourself what you hope to get out of it. That can help you‌ decide if it's worth doing. 

Reasons to refinance a personal loan

There are plenty of good reasons to refinance a personal loan, including:

• Your credit score has improved. If your credit score has improved since you first applied for your loan, there's a chance you'll qualify for a lower interest rate than you landed the first time around.

• You now have a co-signer. If you don’t like your current interest rate, you might land a better rate if someone with a high credit score agrees to be your co-signer. Not all lenders accept co-signers, so make sure to ask before you apply.

• Interest rates have dropped. If the rates have dropped since you took out the original loan, the lower rate could save you money.

• You need a lower payment. Odds are your loan balance has decreased since you first borrowed the money. If so, you may find that refinancing the new, lower balance could lower your payment. 

• You want to switch rate types. While a variable interest rate can rise or fall depending on the economy, a fixed-rate loan remains the same over the life of the loan. If you want to move from a variable rate to a fixed rate, refinancing is an excellent way to do it. 

• You want a different lender. Switching lenders is a perfectly good reason to refinance. 

• You want to consolidate debt. If, along with your personal loan, you have other debt, you may wish to take out a new personal loan to consolidate the multiple debts into a single loan. 

When is the right time to refinance a personal loan?

The best time to refinance a personal loan is when it clearly benefits you in some way. The benefits of using a new loan to pay off other debts are generally these:

• Lower your interest rate (it usually doesn’t make sense to pay off a debt with a loan that has a higher rate)

• Lower your monthly payment (if you get a lower rate and the same loan term, or a longer loan term)

• Reduce the number of monthly payments you make (if you use the new loan to pay off more than one debt)

• Get a fixed interest rate

For example, say you've got a $10,000 personal loan at 25.99%, with 24 months remaining. You get a new loan for the same amount and term, only you're paying 18.49% instead. 

Your monthly payment would drop from $539 to $502, saving you $37 per month. More importantly, you'd save $890 in interest charges. 

Now, what if you decided to refinance the same loan with a term of 18 months instead of 24? In that case, your payment would go up to $640 per month. But you'd get rid of the debt six months sooner, and save $1,402 in interest charges.

Running the numbers with a personal loan calculator can help you explore the different scenarios.  

If you can qualify for personal loan rates that are lower than when you took out the original loan, you have a better shot at saving money. On the other hand, if interest rates have gone up since you took out the loan, your margin for saving money on interest might be smaller. 

Steps to refinance your personal loan

If you're ready to refinance a personal loan, it's not that difficult. Here's a step-by-step breakdown of what's involved. 

1. Set your goals for refinancing. Do you want to get a lower rate? Or to free up cash flow in your budget? Knowing your goal can help when it's time to choose a loan.

2. Figure out how much you need to borrow. Your new loan amount should be enough to pay off your current loan. You can ask your current lender for a payoff quote.

3. Get rate quotes. Shop around to compare online personal loans. Get rate quotes from lenders who do a soft credit check. 

4. Apply for a new loan. Once you choose a lender, apply for a refinance loan. This is likely to require a hard credit check, meaning the lender pulls your credit reports and scores. 

5. Review the loan offer. If you're approved for the loan, the lender should give you all the details, including the interest rate, payment schedule, and fees. Read through this carefully to make sure you know what you're agreeing to before you sign. 

6. Sign the loan agreement and get funding. If you're happy with the loan terms, sign the final paperwork to get the loan funds. Your lender will need your bank routing number and account number to deposit the money. 

7. Pay off the old loan. Once the funds from the new loan are in your bank account, use them to pay off the old loan. Alternatively, you could let the lender pay off your old loan directly if they offer that option.

After you've paid off the old loan, check your credit reports to make sure the account is reported as paid and closed. If it isn't, reach out to the lender to confirm that the account is paid in full.  

Things to watch out for—risks of refinancing a personal loan

A personal loan refinance is usually a smooth process, but there are some potential risks. For example, watch out for prepayment penalties. That’s a fee for paying off the loan ahead of schedule. If you think you might pay off your loan early, you’ll want to go with a lender that doesn’t charge this fee. Achieve personal loans don’t have a prepayment penalty, but other lenders might. 

When NOT to refinance a personal loan

Refinancing a loan may help you save money, but it's not always the right move. Refinancing may not make sense when:

• The interest rate is higher than it was when you originally borrowed the money

• Your credit score has taken a hit since you first applied for the loan

• The fees associated with refinancing exceed the money you’d save by taking out the new loan

Costs associated with refinancing

Many lenders charge an origination fee for personal loans. This is separate from the interest that you pay. Origination fees can be steep, in some cases as high as 12%. Achieve’s origination fee is 1.99% to 8.99%, depending on the loan amount, the loan term, and your credit standing. The origination fee comes off the top of your loan before any money is disbursed to you. So if you don't take the fee into account, you could be left a little short when it's time to pay off the old loan. 

If you borrow $10,000 and the origination fee is 6%, your lender will charge $600 for the loan. When your loan is final, you’ll get $9,400.

Your credit score plays a role when it comes to origination fees. Most lenders save their lowest interest rates and lowest fees for highly qualified borrowers. If it's important to you to refinance, work on getting your credit score to where you want it to be before applying. 

How to choose the best refinancing offer

When you refinance, you're shopping for a brand new unsecured personal loan. That means taking the same careful steps you took when you chose the original loan that you now want to refinance. Here's what to pay careful attention to:

• Interest rate 

• Eligibility requirements

• Loan amounts

• Loan terms

• Fees, including origination, administrative, and late fees

• Funding time 

• Lender reputation

Alternatives to refinancing a personal loan

The best alternative to refinancing a personal loan depends on your financial situation. Here are some ideas worth considering:

• Home equity loan. If you own a home and have sufficient home equity, you might consider borrowing against that equity. Home equity loans tend to carry a lower interest rate than personal loans, making them a potentially money-saving option. When you take out a home equity loan, your home guarantees the loan. If you don’t repay the loan, you could lose your home.  

• Loan modification. If you're having trouble making the payments on your loan, you can contact the lender to ask about loan modification. Loan modification is a step lenders sometimes take to help borrowers avoid default. Modification could involve lowering the interest rate or extending the loan term. 

• Family loan. If you're fortunate enough to have a family that's happy to help out and you're worried about making your loan payments, you might consider borrowing enough to pay off the loan. Make a written agreement that spells out the payment amount, interest rate (if any), and length of time you need to repay the debt. Honor it like a bank loan to preserve the relationship.

What's next

• Use a personal loan calculator to estimate how much you might save by refinancing. 

• Review your budget and decide how much of a payment you can afford.

Get rate quotes from online lenders like Achieve to compare refinance loan terms.