Your Guide: When And How To Refinance A Personal Loan

Sometimes, circumstances change after you take out a personal loan. You might have trouble making the monthly loan payments and need some relief. Or you might be able to get a better interest rate, due to a better economy or an improving credit score.

In either case, it's possible to refinance a personal loan to better suit your financial situation. Let's take a closer look at refinancing a personal loan so you can decide whether it's the right move for you.

What It Means To Refinance A Personal Loan

Refinancing a personal loan is similar to taking out an entirely new personal loan. You can apply for a loan, either with your current lender or a new one. You then use the funds to pay off your old loan. At that point, you'll start paying off the current loan.

If you do your homework, you might secure better terms that result in paying a lower total amount.

When To Refinance Your Personal Loan – And When Not To

Like so many financial decisions, timing can be vital when refinancing your personal loan. Let's explore how to assess if it's a good time to use a new loan to pay off your old loan.

When Refinancing Makes Sense

Most borrowers want to have a lower monthly payment, if possible, along with a lower cost for the life of the loan. Here are scenarios where refinancing can accomplish those goals.

• If you qualify for a lower interest rate. A lower interest rate is a good way to have a lower monthly bill. Plus you’ll accrue less in interest over the life of the loan, resulting in a less expensive loan overall.
• If you can save with a shorter loan repayment term. If you can get a shorter loan term, you might save money because you’ll likely pay less in interest over the life of a shorter loan. This can be a good option if you're in a good place financially and can afford a higher monthly payment.
• If you can switch from a variable interest rate to a fixed rate. Snagging a fixed interest rate can either help you lock a low interest rate or prevent your interest rate from going up. 
• If you can remove a co-signer. It can often be a relief for a borrower to remove a co-signer from their account – and it's often less stressful for the co-signer, too.

When To Keep Your Current Loan

There are times when it makes sense to keep your current loan. Here are a few examples.

• If you don't qualify for a lower rate. You might consider keeping your existing loan if you aren't able to qualify for a lower interest rate or substantially decrease your monthly payment.
• If refinancing comes with additional fees. Some refinancing offers require additional fees like loan origination fees (often a percentage of the loan amount), so you might wind up paying more compared to your original loan. You might also want to check on prepayment penalties for your current loan.
• If the refinancing will hurt your credit. Applying for a loan might require a hard credit inquiry, which can reduce your credit score. If you refinance a personal loan, avoid getting other loans in quick succession to limit the number of hard credit checks, especially if you're right on the border of credit score ratings.

How To Refinance A Personal Loan In 6 Steps

If you've decided that it's best to refinance a personal loan, what’s next? Here are steps that are often part of the refinancing process.

1. Determine the loan size you need. Your new loan should be large enough to pay off the original loan balance. Be sure to consider charges like early payment penalties and include them in the size of your new loan.
2. Review your credit report and credit score. If you've paid your bills on time, your credit history may help you get a lower interest rate. Check your credit report from the three major credit bureaus to see how much you've improved. And remember, checking your credit report yearly is a good practice even if you're not applying for a loan.  
3. Prequalify for a new loan. After you've checked your credit, prequalifying for a loan provides a more concrete idea of what loan rates are available to you. There might be a soft credit check at this point, but that's unlikely to affect your credit score.
4. Research the best loan refinance terms. Even if you're satisfied with your original lender, it's still smart to see if a new lender offers a better deal. While comparing interest rates is important, so is comparing origination fees and prepayment penalties. 

Discussing your plans and goals with the current lender can be a smart move. They may be more motivated to retain your business.

5. Fill out your loan application. Have all your financial information ready to go as you start this part of the process. You might need pay stubs, bank statements, bank account details and identification. At this point, lenders will likely do a hard credit check.
6. Make on-time payments monthly. Once your loan is approved, it's time to start paying. Automating your payments can ensure that you make minimum payments on time, which can reduce the stress of potentially missing payments.

Alternatives To A Personal Loan Refinance

There may be alternatives to refinancing your personal loan. Here are a few possible options.

Negotiate The Terms Of The Existing Loan

As we mentioned earlier, discussing options with your current lender can be a smart move. You may save a good deal of time researching refinance terms by asking about their options.

Clearly state your goals. If you're short on money and the old loan terms are now challenging, let them know – preferably before missing any payments. If you'd just like better terms, they may be willing to offer a better deal. This might work best if you now have excellent credit.

Look Into Debt Consolidation

If you have other debts that concern you, consider a debt consolidation loan. This option can be used to consolidate multiple debts – even credit card payments – into one loan. This can simplify your payments and make it easier to track debts.

The Bottom Line: Personal Loan Refinancing Can Save You Money

Refinancing your personal loan can help you make payments on time or save you money over the life of the loan, depending on your financial situation. If you feel a personal loan refinance makes sense for you, you can start an application online today with Rocket Loans℠.