Can You Refinance a Personal Loan? How to Do It
Yes, you can refinance a personal loan. Refinancing a personal loan entails taking out a new personal loan and using those funds to pay off the old loan. The point of refinancing a personal loan is to save money, so the new loan should have a lower interest rate. After you refinance, you’ll hold the same amount of debt but accrue less interest each month, making the loan less expensive in the long-term. That’s assuming the new loan has no origination fee. But even loans that do charge origination fees can be worthwhile if their APRs are low enough.
Some people may also try to lower their monthly payments by switching to a longer loan payoff period. But unless the interest rate also lowers proportionally, that could result in the borrower paying more interest in the long run, since the loan will accrue additional interest during the extra months. On the other hand, switching to a shorter payoff period could bring higher monthly payments but less interest overall.
Almost all personal loans can be used for refinancing. You can typically use personal loan funds for anything you want, as long as it’s not illegal. In some cases, a lender may offer personal loans only for a certain purpose (such as medical bills or home improvement), in which case you may not be able to use the funds for refinancing. But that’s not the norm.
It’s also possible to refinance through borrowing methods other than personal loans. The best alternative is a balance transfer credit card. Read on for a more in-depth explanation of how personal loan refinancing works.
How to Refinance a Personal Loan
The process of refinancing a personal loan is very similar to getting your original personal loan. But since you have an existing loan, there are certain things that you need to keep in mind at each stage of the process.
- Check your credit score. The first step to getting any loan is to have a clear picture of your credit situation. If you’re trying to refinance a personal loan, your credit score should ideally be higher than when you first took out the loan. Otherwise, you may have a difficult time finding a loan with lower interest rates. You can check your credit score for free on WalletHub.
- Compare lenders. You should take your time to look through as many personal loan options as possible in order to determine the best one to use to refinance your current loan. Weed out any loans you can’t qualify for with your current credit score. Then, eliminate ones that don’t offer the potential for lower interest rates than you already have. It’s also generally best to avoid loans that charge origination fees, if possible.
- Apply for the loan. Depending on who provides the personal loan, you may be able to apply online, by phone or in person at a branch. The application process shouldn’t take long, but you should take your time in order to make sure you input all the information correctly. Otherwise, it could slow down the lender’s evaluation of your application.
- Wait for approval. In most cases, you should receive a decision within just a few business days. And if you’re approved, you’ll typically receive your money within seven business days of applying. It could take less or more (up to 30 days), depending on the lender.
- Pay off the old personal loan. Some lenders may directly pay off your old creditor if you indicate your account information on the application. But in most cases, you’ll just receive a lump sum of money from them and will need to make a payment to your old creditor for the full remaining balance. It’s important to do this as soon as possible. You don’t want to have two loans open at once. Personal loan providers typically don’t charge pre-payment penalties, but you should always check.
- Make payments on your new loan. You’ll be responsible for making regular payments (usually monthly) on your new debt, just like with the old loan. And remember – you can always pay more than the minimum required each month. The vast majority of lenders will not penalize you for doing so. Paying more than the minimum will help you pay off your loan sooner and help you save on interest.
Should You Refinance a Personal Loan?
You should refinance a personal loan if it will save you money, to put it simply. There’s no point in refinancing if the new loan doesn’t provide you with better terms than your previous loan. There are a few more conditions you’ll need to meet, too.
When to refinance a personal loan:
- When it saves you money. Before accepting any personal loan refinance offer, examine the costs. Ideally, the new loan should have a lower APR than your original loan.Also, consider how many months the new loan will last compared to your current loan. If the new loan lasts a lot longer but doesn’t charge much less interest, you could end up paying more in the long term, even if your monthly payments are smaller. Conversely, if you switch to a shorter loan, you may pay more each month but will pay the loan off earlier and save on interest.In addition, if your new loan has an origination fee, that would add on an extra expense.
- When your credit score has improved. If your credit score has stayed the same or worsened since you took out the original personal loan, the chances of getting a significantly better interest rate are slim. But if your score has gone up, you should hopefully be able to qualify for a better rate. If you have significantly more income and/or less debt than before, that will help as well.
- When you’re not about to make a big financial decision. Applying for a new loan to refinance an existing personal loan will result in a hard pull of your credit. That will drop your credit score by a few points temporarily. And if you’re about to do something like take out a mortgage or buy a new car, you want your credit score to be as high as possible.
- When other options aren’t better. The main alternative to refinancing a personal loan is to simply transfer the balance to a credit card. Depending on the card and your credit score, you may get a better deal with a balance transfer. Balance transfer cards are best for shorter payoff timelines (6 - 21 months) because their introductory APRs expire after a certain number of months and are replaced by high regular APRs.
Personal Loan Refinance Alternative: Balance Transfer Credit Cards
A balance transfer credit card is a common tool for refinancing relatively small debts. The issuer of the credit card pays off your original debt, and then the same amount gets charged to the credit card. You then owe the debt to the credit card issuer.
Ideally, the card will have a lower interest rate than your loan. Many credit cards offer 0% introductory APRs on balance transfers, with the average lasting 12 months and the best balance transfer cards giving as long as 18-21 months with no interest.
There are a few reasons you might not want to use a balance transfer card, however. The first is that most come with balance transfer fees of 3% - 5% of the loan amount. You’ll have to weigh that extra cost against any interest-free period. Plus, after a balance transfer card’s intro period expires, there’s usually a high regular APR (over 19% on average). Depending on how big your original debt is, you may not be able to get a credit card with a high enough limit to accommodate it, either. And even if you can, you might be worried about the debt using up most or all of your credit limit, which is bad for your credit score.
So in some situations a balance transfer card may be better than simply refinancing a loan with another loan, and in other cases it may not be.
It can be a good idea to refinance a personal loan. But before you choose to do so, make sure you research your options thoroughly. Only refinance if you’re sure you will save money and if you can’t get a better deal through a balance transfer credit card.
WalletHub provides a few free tools that can be helpful for comparing the costs of refinancing a personal loan. The first is our personal loan pre-qualification tool. It allows you to see your odds of approval with various lenders, along with an estimate of the APRs you might receive if approved.
You can also use WalletHub’s balance transfer calculator to help you see how much you could save by moving the debt to a cheaper credit card.
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