How To Refinance a Personal Loan (and When to Do It)

Refinancing a personal loan could be a great way to improve its terms and conditions. When you refinance, you essentially trade in your current loan for a new one. Whether you want to reduce your monthly payments or you need a longer repayment term, refinancing is an option worth considering. 

5 steps to refinance a personal loan 

The process of refinancing a personal loan may vary from lender to lender. In general, the process works like this: 

1. Research lenders 

While it may be tempting to refinance with your current lender, you might be able to find a better offer elsewhere. Shop around to learn which banks, credit unions, and online lenders offer refinancing. Then, compare the rates, terms, and fees of each refinancing option. 

2. Choose an offer and gather documents 

Once you choose the right refinance offer for your goals, collect the documents you’ll need to apply. Many lenders will ask for a government-issued ID like a driver’s license or passport, along with pay stubs and bank statements. 

3. Apply 

Fill out the refinancing application online or in person at a lender near you. You’ll need to share personal details like your name, email, and phone number, and will also have to provide information on your current loan. 

4. Wait for approval 

You’ll need to wait until the lender reviews your application and gets back to you with a decision. At Advance America, you’ll typically know within minutes of submitting your application whether you’re approved. 

5. Start making payments on your new loan 

After you’re approved for refinancing and use the funds to pay off your current loan, you’ll want to review your repayment plan. Remember, refinancing a personal loan only pays off if you diligently make on-time payments towards the new loan. 

When it makes sense to refinance a personal loan 

Sometimes, it can be difficult to figure out when it’s time to refinance. Here are some instances where it may make sense: 

You can’t afford your current monthly payments 

If your payments on your current loan are too high, you might consider refinancing to get a longer repayment term. You’ll be extending the number of payments (and likely increasing your total debt), but you’ll pay less each month. 

Your credit has improved 

Chances are that you didn’t receive the best terms if you applied for a loan when you had a poor or moderate credit score. If your credit score has improved since you initially took out a loan, refinancing may get you better rates and terms. 

You want to repay your loan faster 

Refinancing to a loan with a shorter term and higher monthly payments can help you pay off your debt faster. You’ll also pay less interest overall. Just make sure you have enough income to make the larger monthly payments so that you don’t end up in more debt than before you refinanced. 

You need extra cash 

Depending on the type of loan you currently have, you might be able to refinance and get some extra money to cover bills, groceries, and other expenses. As with any loan, it’s important to be smart about your financing options and only apply for a refinance when it makes sense to do so. 

Benefits of refinancing a personal loan 

Refinancing can offer quite a few benefits, depending on your situation. Some advantages to refinancing an existing personal loan include: 

You could get a lower interest rate 

The biggest potential advantage of refinancing a personal loan is that you may lock in a lower interest rate. This is particularly true with larger loans like mortgages and student loans. 

The key to getting a lower interest rate is to improve your credit score so that you qualify for better rates. Once you do, you could save hundreds or even thousands of dollars through refinancing. 

You could get a shorter repayment period 

Another way to save money through refinancing is by reducing your repayment period with a new loan. Your financial situation may have changed, allowing you to make larger payments. If your current loan has pre-payment penalties, refinancing could potentially save you hundreds! 

Make monthly payments more manageable 

On the other hand, it's also possible that you need to lower your monthly payments. If that's the case, refinancing can lengthen your loan term, resulting in smaller monthly payments that are easier to budget. 

Make it easier to keep track of your loans

Finally, refinancing can be a smart option if you're currently paying off more than one loan. 

For instance, let's say you have a student loan, a car loan, and credit card debt. Rather than making small monthly payments on each loan, you could refinance and use the new loan to pay off all your current debt. This way, you only need to keep track of one loan. 

When is refinancing a loan not a good move? 

There are many instances when refinancing a loan can help save money and make repaying a loan easier. However, this isn’t always the case, and there are situations when refinancing a loan could actually cost you. 

You won’t lower your interest rate 

Interest rates play a primary role in what your monthly payments will be for a loan. If you applied for your loan when interest rates were low, and they have now risen, refinancing is not a good idea. This is because higher interest rates will result in a larger loan and higher monthly payments. 

You can’t afford your new payments 

One of the advantages of refinancing a loan is to shorten your repayment window and lower your monthly payments. If you won’t be able to afford your new payments, however, refinancing could put you deeper into debt. 

You’ll have to pay a large origination fee 

Refinancing a loan can save you hundreds or even thousands of dollars. However, because you’re taking out a new loan to pay off the old one, you may have to pay an origination fee. If the origination fee is as much or more than what you’ll save refinancing, there’s no point in refinancing. 

Additionally, refinancing certain loans, such as your mortgage, will come with closing costs. If these costs are large enough to offset your savings, refinancing your mortgage may not be the right move. 

It could hurt your credit score 

When a lender is determining whether to give you a refinancing loan, they will do a hard credit inquiry, which could temporarily hurt your credit score. In most cases, the credit hit isn’t enough to damage your score long term. 

The issue is if you plan to take out other loans in the near future and your credit score is already teetering between good and fair. In that case, the dip in credit could disqualify you from receiving important loans until you rebuild your credit. 

Types of personal loans you can refinance 

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There are several types of personal loans you can refinance regardless of how large they are, including: 

Payday Loans 

Payday Loans are short-term, small-dollar loans you pay back when you receive your next paycheck, usually in two to four weeks. These personal loans can provide fast cash to cover expenses until you get paid. If you can't afford to repay your Payday Loan as expected, you might be able to refinance it to avoid costly fees and penalties. 

Installment Loans 

With an Installment Loan, you’ll get a sum of money at once and repay it over time via fixed monthly payments or installments. Your repayment schedule for this personal loan may be anywhere from a few months to several years, depending on the loan terms. 

Title loans 

Car title loans are secured personal loans that use your car as collateral. Upon approval, you’ll give the lender your title in exchange for a lump sum of money based on how much your car is worth. However, if you can't repay the loan when it's due, the lender will keep your car in exchange. 

If you can't repay your title loan and don't want to lose your car, you may be able to refinance it. 

Mortgages 

Mortgages are loans designed to help you cover the high cost of a house, condo, or other property. In many cases, you’ll repay your mortgage in 15, 20, or 30 years. Unless you have hundreds of thousands of dollars in your bank account, you'll likely need to apply for a mortgage to purchase a home. 

It’s no secret that mortgage rates and terms are volatile, and there's a chance you might close on your home when rates are high, resulting in a larger monthly payment. If that's the case, you might be able to refinance your mortgage. 

Student loans 

Student loans are one of the most refinanced personal loans because people are likely to have many different types of student loans. Because each of these loans can have different interest rates and repayment periods, paying them off individually is complicated and expensive. By refinancing them, you may be able to get a lower rate and more favorable repayment terms. 

Personal loan refinance FAQs 

Does refinancing affect your credit score? 

Refinancing can temporarily lower your credit score by several points if the lender does a hard credit inquiry when evaluating you for a loan.

How soon can you refinance a personal loan? 

You can choose to refinance a personal loan as soon as you start making monthly payments on it. However, chances are that refinancing won’t be worth it in the first month or two, because interest rates likely haven’t lowered.