Personal Loan Refinance: How and When To Do It

Key takeaways:

It’s possible to refinance a personal loan. However, you’ll want to ensure the new loan’s terms are more favorable before replacing your original one.
The main factors to look for when refinancing include getting a lower interest rate, lower monthly payments, and better terms–such as a shorter repayment term.
Refinancing may not be a smart financial move, as you could come across higher interest rates, fees, and penalties.

Some borrowers consider refinancing a personal loan to change their interest rate, monthly payment, or repayment timeline. Before moving forward, it’s important to understand how refinancing works and whether applying for a new loan may better align with your financial goals.

This article explains how personal loan refinancing works, when it may make sense, and what alternatives you may want to consider.

What refinancing a personal loan means

Refinancing a personal loan typically means replacing your existing loan with a new one. The new loan may have different terms, such as a new interest rate or repayment period.

Refinancing involves working with a different lender or with the same lender. Approval depends on your current financial profile, including income, debt obligations, and credit history.

How personal loan refinancing works

To refinance a personal loan, you typically need to apply for a new loan or line of credit to pay off your existing debt. You could refinance a personal loan with the same bank or lender, or choose a different one depending on who offers the most favorable rates and terms.

Once you’ve paid off the original loan in full, you’ll start making payments toward your new loan with different interest rates and terms. In some cases, a new loan may offer a lower interest rate or different terms that could reduce costs over time.

So the general process for refinancing a personal loan may include:

Reviewing your current loan terms
Comparing potential loan offers
Applying for a new loan
Using the new loan to pay off the original balance

Refinancing takes time to research, compare quotes, and complete applications. If your loan is close to being paid off, refinancing may not be worth the hassle.

When borrowers should consider refinancing

Refinancing may make sense in some situations—such as when it could reduce your overall cost.Consider these instances when refinancing your personal loan might be more favorable:

Your credit score has increased.
You’re looking to lower your payments.
You prefer to pay off the loan faster.
You want to switch from a varied interest rate to a fixed one.
You want to avoid paying a balloon payment of a larger amount at the end of your term.

Refinancing does not guarantee lower payments or reduced total cost. Eligibility and terms depend on underwriting review at the time of application.

When refinancing may not be necessary

It’s important to also know scenarios when it doesn’t make sense to refinance a personal loan:

You don’t qualify for better interest rates or terms.
Fees or penalties outweigh your savings.
You’re preparing to finance another purchase that could decrease your credit score.

If refinancing your personal loan doesn’t seem right for you at this point, it may be worth waiting, paying off the loan in full now, or looking into an alternative option—like a balance transfer credit card.

Refinancing vs applying for a new personal loan

Borrowers sometimes assume refinancing is the only way to adjust loan terms. However, applying for a new personal loan may also be an option depending on your needs.

The table below outlines key differences between those financial options:

Option	what it does	when it may be considered
refinancing	replaces your existing loan	if new terms significantly improve your situation
applying for a new loan	adds an additional loan	if you need extra funds or separate financing
debt consolidation loan	combines multiple debts into one	if managing several payments

If your objective is to access additional funds rather than replace your current loan, applying for a new personal loan may align more closely with that goal.

How to refinance a personal loan in 6 steps

Refinancing a personal loan is a similar process to applying for a loan. And knowing what to expect throughout the process can benefit you.

1. review your current loan details

Start by gathering information about your existing loan, including:

Current interest rate
Remaining balance
Monthly payment amount
Remaining repayment term
Any prepayment penalties

Understanding these details will help you determine whether refinancing may provide a meaningful benefit.

2. Check your financial standing

Before you make any big money moves, check the standing of your credit score and financial situations. Your credit score should be at least as strong as when you first borrowed the money to assure you’ll get better new terms. For personal loan refinancing, a higher score is ideal to get you a lower interest rate.

You should also check:

Income and employment status
Debt-to-income ratio
Payment history

If your financial profile has improved since you first borrowed, you may qualify for different loan terms.

If your credit score isn’t strong, try to improve your credit score and aim to reach a higher number before applying for a new loan. A good credit score will help you save the most money when refinancing a personal loan.

Although, there are alternative lending options available that look beyond your credit score. Upstart’s model considers factors such as your education² and employment history so you don’t have to solely rely on your credit score alone.

3. Compare potential loan options

When you inquire about refinancing your personal loan, compare quotes from numerous companies to see which one offers the most affordable borrowing options.

When comparing offers, review:

Interest rate (APR)
Monthly payment
Loan term
Total repayment amount

Pro tip: You may consider shopping for personal loans through Upstart. Upstart’s model considers multiple factors, such as education² and employment history, in addition to credit information.You can check your rate at any time and prequalify before you commit to a lender. Prequalification is not a guarantee of approval. Final terms depend on verification.

4. Submit a formal application

When you’ve decided on a lender, you’ll fill out a formal application to start the refinancing process. This may trigger a hard credit check, which will temporarily lower your score by a few points as your lender checks your credit report. You may need to submit the required documents, which may include tax returns or pay stubs.

5. Receive your funds

After approval, some lenders may fund loans as soon as the same or next business day, while others may take longer.. Otherwise, the typical time frame to receive your funds is about 1 week. While you wait, make sure to keep up with payments on your old loan.

6. Pay off your original personal loan

Once the funds have been distributed, you can pay off your old personal loan by contacting the associated lender and following their instructions. Follow up with them to confirm your debt was paid in full and ask for documentation. That way, you won’t come across any additional fees.

Continue making payments toward the new loan and rework your monthly budget, taking into account your new loan terms and payments.

Important considerations of refinancing a personal loan

Before deciding to refinance your personal loan, be aware there are some potential drawbacks:

Higher interest rates. Lower monthly payments might help now, but they cost you in the long run. If you choose a longer repayment term when refinancing, you’ll be in debt longer and could end up paying more in interest over the life of your loan.
Origination fees. Some lenders charge origination fees that can be as high as 10% of the loan amount. It’s important to make sure the amount you’ll get after the lender applies this fee is enough to fully refinance your loan.
Prepayment penalties. When you pay off a loan balance before a term ends, you might face a prepayment penalty, which could reduce your potential savings. Check the terms of your current loan beforehand.
Difficulty qualifying. It can be difficult to qualify for a new line of credit if you’re struggling financially and have a low credit score.
Negatively impact your credit score. Refinancing counts as an inquiry for a new line of credit. When a lender runs a credit check, it could set your score back a few points.

Looking ahead to better financial decisions

A personal loan refinance isn’t the best option for everyone. But it’s smart to look into refinancing your personal loan if there’s plenty of time before the payoff date.

Compare the pros and cons of refinancing to see how it can affect your current financial situation. Do your research and find a lender with the best terms–including lower interest rates and lower monthly payments–and watch out for possible fees or penalties. Think of ending one loan and starting a more favorable one like opening a door to better opportunities.

Personal Loan Refinancing FAQs

There are many questions one might have about refinancing a personal loan. Consider the following in comparison to your situation.

How many times can I refinance a personal loan?

There’s no limit to the number of times you can refinance a loan. However, your current lender might enforce a waiting period of around 6 months between when you close on a loan and open a new one.

If you decide to refinance multiple times, you’ll need to maintain a high credit score. Otherwise, too many inquiries on your credit report can raise a red flag to lenders and decrease your score. This can make it more difficult to get approval and more flexible terms.

Does refinancing my loan hurt my credit?

Refinancing will impact your credit temporarily. Once you proceed with the loan process, the lender will implement a hard credit inquiry. This lowers your credit score by a few points. As you practice good financial habits and continue making on-time payments, it’ll bounce back fairly quickly.

Typically, lenders will first allow you to see if you prequalify with a soft inquiry, which doesn’t hurt your credit score.

Pro tip: It may be in your best interest to wait on refinancing your loan if you’re looking to buy a new car, house, or move into an apartment. A small hit to your score could risk your chances of getting approved for a larger purchase, as lenders will check your credit report.

Is it better to refinance with the same lender or a new lender?

Refinancing with the same lender may offer a more streamlined process, while working with a new lender may provide an opportunity to compare different rates and repayment options. Reviewing the total cost, loan term, and eligibility requirements can help you determine which option best fits your needs.

^2.Neither Upstart nor its lending partners have a minimum educational attainment requirement in order to be eligible for a loan.

Refinance a Personal Loan? How and When To Do It