Can you refinance a personal loan?
By Rebecca Lake
Reviewed by James Heflin
Dec 11, 2023
Read time: 6 min
Personal loan refinancing means using a new loan to pay off an old one.
Refinancing a personal loan could help you save money on interest, lower your monthly payments, or both.
In some cases, refinancing a personal loan could help you get rid of your debt faster.
You're eyeing your personal loan and thinking, "There's got to be a better deal out there, right?" Absolutely. Refinancing could be your golden ticket to shrinking those payments and freeing up some cash. It's like finding a coupon for your loan—who doesn't love a good discount? You could use the extra money each month 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 can make your debt more affordable.
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 if you get a lower interest rate or if you choose a longer repayment term.
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). This means you could pay off your loan faster.
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.
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 (if the loan you pay off has a variable interest rate)
For example, say you've got a $10,000 personal loan at 18.99%, with 24 months remaining. You get a new short-term loan for the same amount and term, only you're paying 11.99% instead.
Your monthly payment would drop from $504 to $471, saving you $33 per month. More importantly, you'd save $800 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 $610 per month. But you'd get rid of the debt six months sooner, and save $1,121 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.
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.
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.
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.
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.
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.
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.
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, it's important to know exactly what fees you're paying a lender.
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 6.99%, 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.
Also, 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.
Use a personal loan calculator to estimate how much you might save by refinancing.
Review your budget and decide how much you want to budget for your payment.
Get rate quotes from online lenders like Achieve to compare refinance loan terms.
Rebecca is a senior contributing writer and debt expert. She's a Certified Educator in Personal Finance and a banking expert for Forbes Advisor. In addition to writing for online publications, Rebecca owns a personal finance website dedicated to teaching women how to take control of their money.
James is a financial editor for Achieve. He has been an editor for The Ascent (The Motley Fool) and was the arts editor at The Valley Advocate newspaper in Western Massachusetts for many years. He holds an MFA from the University of Massachusetts Amherst and an MA from Hollins University. His book Krakatoa Picnic came out in 2017.
Frequently asked questions
What's the difference between refinancing and consolidating loans?
Does refinancing a loan hurt your credit score?
The way credit scores work, getting a new loan can both hurt and help you.
Refinancing a loan can hurt your credit standing in the short term, since a hard credit pull will show up on your credit report and usually cause your credit score to dip by a few points. The inquiry only factors into your score for one year, and its effect lessens over that time. Also, any time you open a new credit account, your average credit age goes down, which can cause your score to dip. Older accounts are better for your credit profile.
Refinancing a loan can help your credit standing over time. Making on-time loan payments is the best thing you can do to build and maintain a healthy credit profile. Also, you get points for having experience with different kinds of credit. If you have a credit card and a student loan, and you add a personal loan, that could be good for your credit standing.
Can I refinance a personal loan with the same lender?
Whether you can refinance a personal loan with the same lender depends on the lender's policies. Some might allow you to refinance to keep you as a customer, while others may not.
At Achieve, you can refinance a personal loan with a new personal loan. We love it when we can help a customer improve their financial life.