4 benefits of refinancing a personal loan

If you currently have a personal loan, refinancing could be a smart way to improve your financial situation. Refinancing your personal loan could be a chance to get a lower interest rate, 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 or you want to pay off your loan faster, refinancing could be the right move. Let's look at the benefits of personal loan refinancing and why you might consider it. 

Refinancing a personal loan involves a little bit of homework, since you'll need to research lenders and apply for the loan. But refinancing may be worth it, depending on why you want to refinance and what new loan you qualify for. Here are some of the benefits you might reap from replacing an existing personal loan with a new one. 

1. Refinancing could lower your interest rate

You might be able to refinance to a new 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's a plus for budgeting since your monthly payments won't change. But it can be a downside if you're paying a higher rate compared to what you could get now.

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 fee to get the loan, and how long you take to pay off what you owe.

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: Get rate quotes before you apply so that you’ll have an idea of what you might qualify for. Remember to look for lenders that offer personal loan rate quotes with a soft credit check that doesn’t impact your credit standing. 

2. You could pay your loan off faster

When you refinance a personal loan, one thing you'll have to consider is what kind of new loan term you want. 

Replacing your old loan with a new loan that has a shorter term could help you pay off the debt faster. Paying off a loan sooner could mean that you end up paying less in interest overall. 

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, shortening your loan term could get you closer to debt freedom in less time. 

3. Payments could be more manageable

Lowering your 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. Refinancing a personal loan could help you get a lower payment and add some breathing room back into your budget. 

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

• Reducing your interest rate, which can translate to a lower payment

• Refinancing into 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. 

Let's look at 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 gets you a lower payment and lower total costs. Big savings. 

Now 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. 

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).

4. You could improve your credit

Terms that work for you could help you manage your finances better so you can maintain a good credit standing.

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. 

But…there's an upside where your credit is concerned. If your new loan payments are easier to manage, it's less likely that you'll pay late. 

On-time payments have a significant positive impact on your credit. And over the long term, good credit can save you money if you're qualifying for low interest rates on other loans or lines of credit. 

When refinancing a personal loan makes sense

Refinancing a personal loan could make sense if you need or want different loan terms. And you might consider refinancing if you want to work with a different lender, borrow more, or consolidate other debts. A loan consultant can help you evaluate the upsides (and the potential downsides) so you can decide if the time is right to refinance a personal loan.