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Can You Refinance a Personal Loan?

By Janet Schaaf · December 09, 2021 · 5 minute read

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Can You Refinance a Personal Loan?

Consolidating credit card debt or other high-interest debt is the most common use of personal loans. It makes perfect sense that people want to save money on interest, especially as credit card interest rates can range widely, with the current average just above 16% .

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 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 a variety of reasons to refinance a loan, it mainly comes down to two.

1.    To lower the overall interest rate and total interest paid.

2.    To lower the 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 other factors being 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 necessarily 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 difficulty 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.

Possible Advantages of Refinancing a Personal Loan

There are several reasons someone would want to consider refinancing their personal loan.

Paying Less Interest

If you are able to obtain a loan with a lower rate of interest, it may be possible to save a significant amount of 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.

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.

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 have more options to research and can compare the terms, rates, fees, penalties, and customer service that different lenders offer.

Possible Disadvantages of Refinancing a Personal Loan

Unfortunately, refinancing a personal loan might not work for everybody. Here are some of the disadvantages.

Your Credit as a Factor in the Application Process

In general, good credit may help borrowers qualify for more favorable 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 score is hindering your application, taking steps toward improving it before refinancing your personal loan might help.

It May Cost Money To Refinance

Lenders may charge origination fees when taking out a new loan and prepayment penalties when paying off an existing loan.

Depending on the amount of the fees charged on the loan, even a lower rate may not lead to substantial savings for the borrower. While you’re crunching the numbers on refinancing, consider all of the potential fees in addition to the interest rate.

Refinancing a Personal Loan

From start to finish, here are some things to know about refinancing a personal loan.

Checking Your Credit Score

Thinking about refinancing a loan is sometimes triggered by an improvement in a person’s credit score and the desire to get a lower interest rate as a result. The first step is to review your credit report.

You are entitled 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 federally 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, as they may charge you for a subscription or other services.

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. A review of your credit report will reveal any factors that might be adversely affecting your credit score.

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 late fees, prepayment fees, origination fees, application fees, or any other fees that may cause a loan to be significantly more expensive over time than it seems at first. If you are not clear on what fees are being charged and how much a loan will cost, don’t be afraid to ask questions until you understand.

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Applying for a Loan

Once you’ve decided on a lender who can help you refinance to a new loan, it’s time to formally apply. You can get a head start by gathering all the pertinent documents, such as pay stubs and recent tax returns, so that the lender can verify your income and other financial information. It’s also recommended to request a loan payoff statement from the lender of the loan being refinanced so you’ll know exactly how much is owed on the loan.

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 copies of the documents.

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. This information is typically included in the loan payoff statement. Some lenders may 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 may be easier for the borrower, as 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 for verification that the loan was paid in full.

The Takeaway

Can you refinance a personal loan? Yes, it is possible. Whether it’s right for your specific financial situation is altogether different. Determining your goal for refinancing is the first step, followed by looking at your overall credit health and finding a lender you feel comfortable working with.

SoFi Personal Loans charge no origination fees, prepayment penalties, or late fees. With low, fixed rates and a variety of repayment terms, SoFi might be an option that will work for you.

Learn more about personal loans with SoFi.


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