When & how to refinance your personal loan
Refinancing a personal loan often helps you save money or lower your monthly payments. A personal loan refinance involves taking out a new loan and using that money to pay off your existing debt. You can sometimes do this directly with your original lender, or you may want to work with a new lender.
What does it mean to refinance a personal loan? Refinancing a personal loan means that you’re using a new loan to pay off your existing loan. This is often a good choice if you’re able to get a more favorable term than your original loan. For instance, a new loan may have a lower interest rate or lower monthly payments than your existing loan.
Keep in mind that when you refinance a personal loan, it doesn’t technically mean that you’re taking on more debt. Instead, refinancing helps you chip away at debt more quickly if you secure a lower APR.
When is a good time to refinance your personal loan?
Before you refinance your personal loan, consider if it’s the right time. Here’s a closer look at a few common instances when refinancing may be a good idea.
Your credit score has improved. Your credit score affects your interest rate. If your credit score has changed for the better since you took out your current loan, it may be a smart move to refinance. With a lower interest rate, you’ll pay less for the total cost of the loan.[1]
You want to pay off the loan quicker. A loan with shorter terms can help you pay off your loan faster and save on interest over the life of the loan. However, your monthly payment will go up, so be sure you’re able to swing a higher amount in your budget.
You want a lower monthly payment. If your existing loan’s monthly payment is straining your budget, you may be able to get a new loan with a lower monthly payment. However, by paying less each month, your new loan will likely have a longer term, meaning you’ll pay more interest over time.
Interest rates dropped. Lenders may offer lower or higher interest rates based on market trends. Even if your credit picture hasn’t improved since you first took out a loan, you might still qualify for a lower rate.[2]
Stabilize your interest rate. Some personal loans have variable interest rates, which can cause your rates to rise and fall over the life of the loan. By locking in a fixed interest rate, you gain more control over your budget and overall financial goals.[1]
When should you wait to refinance a personal loan
It’s not always a good time to refinance a personal loan. Here are some instances in which sticking with your existing loan could make sense.
The upfront fees are too expensive. Some loans come with an origination fee, which is a percentage of the loan amount that’s deducted from the loan funds. These can add to your overall loan balance. Understand the terms involved with refinancing to ensure it makes financial sense. If you can’t afford the extra cost, consider waiting to refinance.[3]
Interest rates are higher than your existing loan. Refinancing isn’t a good idea when you can’t get a lower interest rate because your credit score has dropped or market rates have gone up. Choosing to refinance at a higher interest rate could cost you more, so it’s best to wait until you can get a lower rate.[1][2]
Your current loan has prepayment penalties. Some lenders charge fees for paying off your loan early. In some cases, this penalty may be a percentage of the outstanding loan balance you pay off. Read the fine print of your existing loan terms carefully to determine the cost—if any—associated with paying off your loan early. Then compare offers to make sure you’re still getting a fair deal after paying the fee.[4]
Your credit could be affected. While you can often check loan rates with a soft credit check, some lenders require a hard credit pull before funding your new loan. This can lower your credit score by a few points temporarily, so keep this in mind before refinancing.[5] Learn more about soft vs. hard credit inquiries.
How to refinance a personal loan
Getting approved for a personal loan refinance will depend on your financial situation. You can get the process started by following these steps.
1. Decide how much money you need
First, look up how much you owe on your current personal loan. Then, check if your current lender charges any prepayment penalties or fees, as that will affect the total amount needed for payoff. Add both of these numbers to get your estimate.
Or, if you want to refinance more than one loan, add up the total combined amount (including potential penalties or fees). Refinancing multiple loans is also called debt consolidation, as you’re essentially combining multiple loans into one. In some cases it makes sense to take out one personal loan and use those funds to pay off other personal loans, credit cards, and high-interest debts all at once.
2. Check your credit
You may also want to check your credit score to see if you’re likely to qualify for a new personal loan with a more favorable interest rate. Having excellent credit—a score above 750—is ideal. However, loan options may still be available even if your credit scores are in the fair or good ranges. When checking your credit report, review it closely for any errors. If you find any, file a dispute with one of the three major credit bureaus immediately, as errors can affect your credit score.[6]
3. Compare personal loan refinance rates and fees
Many lenders, like LendingClub Bank, let you check to see if you prequalify for any loan offers before applying. This gives you the opportunity to review the estimated loan amounts, interest rates, loan terms, and application and origination fees to see if refinancing your debt(s) makes sense. If possible, opt for lenders who, like LendingClub Bank, don’t charge a prepayment penalty or exit fee in case you need to refinance your debt in the future.
Keep in mind, an origination fee may be subtracted from the loan disbursement. For example, if you take out a $10,000 loan with a 3% origination fee ($300), you would receive $9,700. With this in mind, consider how much you’ll need to borrow to refinance or consolidate your debts.[3]
4. Find the right lender and apply
It helps to compare loan offers between several lenders to ensure you’re getting the best deal possible.
Even if you received loan estimates before applying, review your official loan offer closely, as the number or terms may be different, especially if there’s been a significant change in your creditworthiness. LendingClub Bank loan offers include your loan’s annual percentage rate (APR), loan amount, term, and origination fee—making it easy to understand terms and compare offers.
5. Pay off your other loan(s)
Your new personal loan will generally be sent, or “funded,” directly into your bank account. From there, you’ll need to use those funds to pay off your other loan(s) to complete the refinancing. The approval process for personal loans varies by lender.
Once approved, it can take several business days to receive the funds, and it may take another few days for the payoff to process from your new lender to your existing lender. To avoid a missed payment, be sure to pay your current loan payments as usual until you receive confirmation that the debt has been paid.
Pros and cons of refinancing a personal loan
You can refinance at any time, so there’s no rule to how soon you can refinance a personal loan. However, as we covered above, it’s not always a good time to get a new loan. If you’re thinking about refinancing a personal loan, be sure to weigh the pros and cons first. Here are some potential advantages and disadvantages to consider before refinancing.
Pros | Cons |
|---|---|
Potentially get a lower interest rate[1] | Origination fees can be expensive[3] |
Pay off your loan faster | May not qualify for more favorable terms[1] |
Lock in fixed rates[1] | Credit score could be affected temporarily[5] |
Lower your monthly payment | Some loans have prepayment penalties[4] |
The bottom line
If you’re thinking about a personal loan refinance, it may come with many benefits, like a lower interest rate, lower monthly payment, or the ability to pay off your loan faster. However, it’s important to consider your personal financial situation, goals, credit score, and market rates. Before agreeing to any personal loan offer, be sure to compare rates and terms against your existing personal loan to make sure you’ll benefit from refinancing.
If you want to refinance a LendingClub loan or a personal loan from another lender, LendingClub Bank lets you quickly check your rate for free without impacting your credit. LendingClub Bank offers fixed-rate personal loans that can be used to refinance existing debt. Choose the loan amount and terms that work for your personal finances, and then use the cash to pay off your old loan. While your credit score may initially see a dip as a new tradeline is added, you may improve your credit score over time by making timely payments on your loan.
Consumer Financial Protection Bureau. “What is a personal installment loan?”
Board of Governors of the Federal Reserve System. “Consumer Credit - G.19.”
Consumer Financial Protection Bureau. “Do personal installment loans have fees?”
Consumer Financial Protection Bureau. “What is a prepayment penalty?
Consumer Financial Protection Bureau. “What’s a credit inquiry?
Consumer Financial Protection Bureau. “How do I get and keep a good credit score?”
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