Refinancing your personal loan: when it makes sense

Personal loans let you borrow a lump sum of money and pay it back with interest. Their flexibility makes them a popular way to borrow. But you may not want to keep the same loan terms forever.

Can you refinance a personal loan? Sure, as long as you're able to qualify for a new loan. The better question is when to do it.

Refinancing can be a smart way to manage your debt if it makes your payments easier to handle or helps you save on interest. If you're ready to trade an existing personal loan for a new one, we'll walk you through when it makes the most sense.

Here are some of the most common reasons to consider refinancing a personal loan.

1. Your credit score has improved

Credit scores tell lenders how you've managed credit accounts in the past. The higher your score is, the easier it is to get approved for personal loans and qualify for lower interest rates.

Why? Because lenders use credit scores as a guide. A higher score means a higher likelihood that you'll pay back what you borrowed.

If your credit score has improved since you took out a personal loan, that could be a great reason to consider refinancing. You might be able to get a lower interest rate on the loan, which could lower your payments and reduce the total amount you repay.

2. You need a lower payment

When you take out a personal loan, one big question to consider is what the payment will be. The goal is to make sure your payments fit your budget.

Refinancing might be a good option if your financial situation has changed and you need a lower payment.

For example, maybe your partner is going to be taking six months off work to stay home with your newborn. Refinancing a personal loan could free up some room in your budget while you're temporarily relying on one income.

Or maybe you're changing jobs to pursue a career path you're excited about, only your new job's starting salary is less than you're making now. You might refinance a personal loan to make it more affordable until your income increases.

3. You want to pay the loan off faster

Refinancing a personal loan could lower your payments, but it could also increase them if you're switching to a shorter loan term.

Moving to a shorter term could help you pay the loan off in less time. And it could save you on interest charges if your debt is paid off in less time.

Of course, you don't have to refinance a personal loan to pay it off faster. You could try other repayment strategies, like paying biweekly or making lump-sum payments when extra cash comes your way.

Those methods could help you chip away at the balance without getting a brand-new loan.

4. You want to switch rate types

Personal loans can have fixed or variable interest rates.

Fixed-rate loans have an interest rate that doesn't change over the life of the loan. You know exactly what your payment will be each month. You can also easily calculate how much the loan will cost in interest.

Variable-rate loans have an interest rate that can change. If your rate changes, your payment could also change.

If you have a variable-rate loan and you're worried about your payments increasing, you might refinance to a fixed-rate loan so you have predictability.

5. You want a different lender

Personal loan lenders aren't all the same, and some offer better benefits than others.

If you're unhappy with your current lender's customer service or want access to features you're not getting now, like a rate discount for showing proof of retirement savings, then it might be worth shopping around for a new loan.

Here's a tip: Get rate quotes from lenders that use a soft credit pull. That way, you can get an idea of what you might pay without impacting your credit standing.

When NOT to refinance a personal loan

Refinancing a personal loan doesn't always make sense. You might think twice about it if any of the following are true:

• You've almost paid off the loan balance (that means you've already paid most of the interest).

• Your new loan would carry a higher interest rate and/or more fees than your current one.

• The difference in rates with a refinance loan is negligible.

• The lender's fee would negate most or all of any interest savings you might get.

• Your current lender would charge you a prepayment penalty for paying the loan off early.

• Refinancing would put you into a longer loan term than you're comfortable with.

Look at your budget, compare rates, and assess your goals to decide if the time is right for personal loan refinancing.

How refinancing could affect your credit

When you apply for a new loan, the lender usually runs a hard inquiry on your credit report. A hard inquiry could cause a small, temporary dip in your credit scores. Once you close your old loan and open the new one, your average account age may shorten, which could also affect your scores.

The new loan keeps affecting your credit as you repay it. Your payment history makes up the largest portion of most credit scores, so consistent on-time payments could help your scores recover and build over time.

Achieve is not a Credit Repair Organization and does not provide, or offer, services or advice to repair, modify, or improve your credit.

How to refinance a personal loan

Follow these steps to refinance your personal loan:

Check your current loan. Find your outstanding balance and confirm whether your lender charges a prepayment penalty.

Check your credit. Know roughly where your scores stand, since they affect the rate you're offered. You can pull your credit report for free once a week from each major bureau by visiting AnnualCreditReport.com.

Compare offers from a few lenders. Compare the APR, fees (including origination fees), and the loan term, not just the monthly payment. You can start by prequalifying with Achieve to get estimated rates, then compare other lenders. Prequalification provides estimates, not guaranteed offers. Most lenders use a soft inquiry for prequalification, which does not affect your credit score.

Apply and get approved. Submit your documents to the lender you choose. Final terms depend on full underwriting and may differ from your estimate.

Pay off the old loan and start payments on the new one. Confirm the old account shows a zero balance and that the lender has marked it closed. Then set up autopay or a reminder so you don't miss the first payment on your new loan.

Find the right personal loan lender

Whether you're ready to refinance a personal loan or you're borrowing for the first time, your choice of lender matters. The best personal loan is one that offers affordable payments with minimal fees and a low interest rate, based on your credit profile. Talking to a loan consultant is a good place to start when you're ready to explore your borrowing options.