3 things to know when refinancing a personal loan

Make the best decision of refinancing your personal loan by understanding how the process works. (iStock)

With interest rates at record lows, it may be a good time to consider refinancing any debts you currently have, such as personal loans. Refinancing your personal loan can not only lower your annual percentage rate, but it could also provide you with an opportunity to combine debts into one payment that can improve your monthly budget.

If you're interested in refinancing your personal loan, use tools like Credible to plug in your loan amount and estimated credit score to compare rates and terms from a variety of reputable lenders. Get started today to see what kind of offers are available to you!

Before you apply for a personal loan refinance, though, it’s a good idea to understand the refinancing process so you can determine if it’s right for you.

1. What refinancing a personal loan entails

Refinancing any type of loan involves taking out a new loan — usually one with a better rate or more attractive terms — in order to pay off an old loan. In some cases, you can refinance the loan through the same lender, or you may choose to use a new financial institution that has better options.

Credible has several personal loan options to choose from. You can use their free rate table to view what a variety of lenders are offering, starting with rates as low as 3.99% APR.


2. Pros and cons of refinancing a personal loan

Refinancing a personal loan has its positives and negatives. It's up to you to decide if one outweighs the other. Here's what you need to know.


  • Reduce monthly payments: It might be an ideal time to refinance in order to take advantage of low rates, especially if your credit score has improved and you can qualify for loans with interest at the lower end of the spectrum. For example, if you currently have a three-year $10,000 personal loan with an 11% interest rate, your payment is $327. By refinancing that account to a loan with a 5.5% rate, you reduce your payment to $302, saving $300 a year in interest. You can use Credible’s personal loan calculator to determine how a reduced interest rate could impact your budget.
  • You can change your loan term: Another benefit of refinancing a personal loan is to adjust the length of your loan period. You can refinance to a shorter amount of time, reducing the amount of interest you will pay over the term of the loan. While a shorter repayment period will increase your monthly payment, you’ll get out of debt faster. You can compare interest rates and term lengths from multiple lenders by using a free online tool like Credible.
  • Lock in a lower rate: And another good reason to refinance is if you currently have a personal loan with a variable interest rate. Since rates are at record lows, refinancing can help you lock it in and take advantage of the current economic climate.



  • It could end up costing you more: If you were already several months into your loan, a new loan may end up costing you more interest in the long run if you refinance to a loan with a longer repayment period.
  • There could be extra fees: Some lenders add in charges for personal loans, such as origination fees. Depending on the amount, it could negate any savings you might get from a lower interest rate. And some lenders have prepayment penalties. While not common, it could cost you more money to refinance to a loan with better terms.
  • You could hurt your credit score: Finally, when you refinance, lenders will check your credit with a hard inquiry. While it’s temporary, it could lower your credit score. If you plan on needing any other loan soon, such as a mortgage, it may impact your rates on future credit.


3. How to refinance a personal loan

If refinancing makes sense for your budget, then take these steps to complete the process:

  • Figure out how much money you need: You can either log into your account online or call your current lender to obtain a payoff balance. This will provide you with an exact amount for your application.
  • Check your credit score and credit report: By understanding your current situation, you can realistically estimate the offers you might be able to obtain and confirm that it makes sense to refinance. You are entitled to a free credit report each year from the three credit bureaus, Equifax, Experian and TransUnion. If your score is low, you can take steps to improve it before you apply.
  • Shop around for the best rates: Take advantage of a site like Credible where you can easily compare offers from multiple lenders without affecting your credit score. You might also want to call your current lender to see if they will be willing to offer you a better rate to keep you as a customer. Be sure to look at the fine print on any offers you receive.

Fill out your application: Once you’ve chosen your lender, fill out the application, and provide the required documentation, such as proof of income, tax forms, bank statements, and identification. Once you’re approved and receive your funds, pay off your current loan. With personal loans, most lenders will deposit the funds in your account instead of facilitating the payoff of the current debt. After you make the payment, confirm that the previous lender has closed the loan.

Start making payments on your new loan: You can set up automatic payments from a checking account to ensure that you don’t miss a payment.

The reason to refinance any loan is to create a more favorable situation for your finances.

Make sure you visit a site like Credible where you can compare offers and terms to find the best loan for your situation. You can also connect with vetted loan officers who can answer your questions. Taking time to understand the process will be valuable for protecting your finances in the long-term.