Making payments towards high-interest debt is frustrating. Also, it may keep people from reaching other financial goals, like saving enough for retirement or saving up to take that trip to a tropical locale.
One increasingly popular way to deal with high-interest debt is by using another, lower-interest source of debt, such as a personal loan.
In fact, consolidating credit cards or other high-interest debt happens to be the most popular use of personal loans among high earners, according to a survey by Credit Karma . It makes perfect sense that people want to save money on interest, especially as credit card interest rates can range widely, with the average hovering around 17% .
But what about saving money on existing personal loans; can that be done? Can you refinance a personal loan, ultimately saving money on interest or lowering your monthly payment?
Depending upon a number of circumstances, the answer may be “yes.” But there will be several things to consider beforehand—it may not make sense for every person and it may not make sense for every loan.
Here, we’ll cover the details on why someone might refinance a personal loan, what goes into refinancing a personal loan, and some advantages and disadvantages of refinancing a personal loan.
Why Refinance a Personal Loan?
While there may be several reasons to refinance a loan, it mainly comes down to two. First, to lower the overall interest rate and total interest paid. Second, a person might refinance to lower their monthly payment.
These two might seem like the same thing, but they’re not.
When a person refinances a loan—a personal loan included—they are exchanging their old loan for a new one. So, it can come with an entirely new interest rate or loan terms. What those look like will depend on what the borrower is looking for and what they qualify for.
Refinancing for a lower interest rate on a loan while keeping the length of the loan the same (or shorter) may allow a person to save money on interest, all else equal. If your goal is to save money on interest each month and overall, this is the strategy that you might want to utilize.
On the other hand, extending the length of the loan in order to achieve a lower monthly payment could save people money each month, but not overall. This could be true even with a lower interest rate. While this strategy won’t save money in the long run, it may be worth it to someone having a hard time making their monthly payments.
In addition to saving money on interest and lowering monthly payments, a person may also consider refinancing to consolidate multiple loans, or to add or remove a cosigner.
Refinancing credit cards or a personal loan to a lower rate is a similar experience to refinancing a student loan. As we move through some of the advantages and disadvantages below, you might notice that many similar principles would apply.
Possible Advantages of Refinancing a Personal Loan
There are several reasons someone would want to consider refinancing their personal loan.
1. Paying less interest
If you are able to obtain a loan with a lower rate of interest, it is possible to save a significant amount on money over time. (This may not be true if you extend your loan term. However, shortening your loan term could expedite your repayment process and save you money on interest over the life of your loan.)
2. Lowering monthly payment
Refinancing to a lower rate of interest, extending the length of the loan, or both, typically provides a borrower with a lower monthly payment. A lower monthly bill could help someone get back on financial track, especially if they are struggling to make their monthly payments.
3. Getting better overall terms
Not all loans are created equal. Especially now that borrowers can access loans from a variety of lenders online and aren’t relegated to their local brick-and-mortar bank, they can afford to do their research and compare the terms, rates, fees, penalties, and customer service that different lenders are offering.
Possible Disadvantages of Refinancing a Personal Loan
Unfortunately, refinancing a personal loan might not work for everybody. Here are some of the disadvantages.
1. Your credit might be a factor in the application process
Of course, this doesn’t have to be a disadvantage! In general, good credit may help borrowers qualify for better terms or interest rates when refinancing.
In fact, an improved credit score may be a reason to seek out a personal loan refinance—though it’s not the only factor lenders may consider. However, if your credit is hindering your application, it might mean you’d want to take steps toward improving your score before refinancing your personal loan.
2. Sometimes, it costs money to refinance
Oftentimes, there are fees associated with both taking out a new loan and paying off an existing loan. They are called origination fees and prepayment penalties, respectively.
That means that it is possible to pay two sets of fees (or more) in order to refinance a loan; even a lower rate may not be worth it. While you’re crunching the numbers on refinancing, always consider all of the potential fees and APR.
Luckily, there are some lenders that don’t try to getcha with pesky fees. SoFi charges no origination fees, prepayment penalties, and late fees. With a SoFi personal loan, you are only charged interest and principal.
Refinancing a Personal Loan
From start to finish, here are some things to know about refinancing a personal loan.
1. Checking your credit score
Oftentimes, someone will become interested in refinancing a loan because their credit has improved and they believe that they can lock in a lower rate. The first step is to check in and see if this is the case.
Because a personal loan is an unsecured loan, which means that it isn’t backed by collateral like a home or car, rates typically depend heavily on the borrower’s credit score and overall financial picture.
You are obligated to a free credit report each year from each of the three major credit bureaus—Equifax, TransUnion, and Experian—through Annualcreditreport.com , which is the only authorized website for free credit reports. Beware of other sites that offer free credit reports or credit scores but that require you to enter your bank information; they may charge you for a subscription or other services.
2. Shopping around for loans
Every bank has different parameters for determining who they’ll offer loans to and at what rate, so it’s always worth it to shop around and compare offers. This could mean looking at traditional banks, credit unions, and online-only lenders.
The pre-qualification process might be slightly different from lender to lender, but in general it is quite fast once you submit some basic financial information and make a request.
Interest rates are important, but that shouldn’t be the only thing a potential borrower considers. Ask about other fees, such as late fees, prepayment fees, origination fees, and application fees, which may cause a loan to be significantly more expensive over time than it seems at first blush. If you are not clear on what fees are being charged and how much a loan will cost, get someone on the phone at said lender who can explain it.
3. Applying for a loan
Once you’ve decided on a lender who can help you pull off a transition to a new, lower-rate loan, it’s time to formally apply. You can get a head start by gathering together all of the pertinent documents, such as pay stubs and recent tax returns, so that the lender can verify your income and other financial information.
If you are applying online, there is generally some sort of portal through which you can upload documents. For a traditional lender, you may need printed out copies of the documents.
4. Paying off the old loan
When the funds are ready to be distributed, the borrower will need to designate where the funds will be sent. Some lenders will only send the money directly to the borrower, who then must turn around and pay off the loan. Other lenders may be willing to pay the old personal loan off directly. For a personal loan refinance, the latter is probably more ideal (as it’s easier for the borrower), so long as there aren’t any additional fees to do so.
Either way, it’s a good idea to follow up with the lender of the original personal loan to make sure that it is paid off in full. If your new lender is paying the old lender, they should send you a confirmation. If you do not receive a confirmation, check directly with the old lender to be certain that there are no loose ends to tie up.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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.
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 .