When and How to Refinance a Personal Loan

Ready to put some cash back in your pocket and make your loan work for you instead of against you? Refinancing a personal loan might just be the financial power move you’re looking for. Whether your credit score has leveled up or you’re chasing a lower interest rate, refinancing a personal could help you save some cash or even make payments more manageable. 

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What does it mean to refinance a personal loan?

Refinancing a personal loan is like giving your debt a makeover. It’s when you replace your loan with a shiny new one – hopefully with better terms, like a lower interest rate or a more manageable monthly payment.

The goal? To save money in the long run or make your payments easier to handle. When you refinance, you take out a new loan to pay off your old one and then you start making payments on the new loan instead. Sounds simple, right? Let’s break it down.

How to refinance a personal loan

Ready to revamp your loan? Here’s your step-by-step guide to refinancing.

1. Determine the amount of money you need

First, figure out how much you owe on your current loan. Your new loan must cover that amount (plus any potential fees for paying off the old loan early – check your loan agreement for that). But don’t just refinance for the same amount; consider whether you need extra funds. Refinancing is also a chance to borrow more if you’ve got something else to cover.

2. Check your credit score and report

Your credit score is the secret sauce when it comes to refinancing. The better your score, the better the loan terms you can snag. Before applying, pull your credit report and make sure everything is in order. If your score has jumped since you first took out your loan, congrats – you’re in a prime position to refinance. If not, maybe give it time and work on boosting that score before moving.

3. Shop around for better rates 

Now’s the fun part – comparison shopping! Don’t just jump at the first offer you see. Take your time and compare rates, terms and fees from different lenders. A small difference in interest rate could mean big savings over the life of your loan. Sign up for MoneyLion’s loan tool to see personalized offers from our top lenders without impacting your credit score. Cha-ching!

4. Prequalify for a new loan

Prequalifying gives you a sneak peek at what lenders are willing to offer without dinging your credit score. It’s a great way to see if refinancing is worth it before committing. You’ll usually need to provide basic financial info, like your income, employment status and current loan details. Based on this, lenders will show you your potential rates and terms.

5. Reach out to your existing loan provider

Before you ditch your current lender, it’s worth a quick chat to see if they can offer better terms. Some lenders will renegotiate your loan if they think they might lose your business. You won’t know unless you ask, so don’t skip this step. You could get a sweet deal without even switching lenders.

6. Apply for the new loan

If you’ve found the right loan for your needs, it’s time to apply. Gather up the necessary documents, like proof of income, bank statements and details about your current loan. After submitting, the lender will evaluate your application and – fingers crossed – approve you for the new loan.

7. Use the new loan to pay off the old loan

Once your new loan is approved, the funds will either go directly to pay off your old loan or they’ll be deposited into your account for you to handle. Either way, the old loan gets wiped out and your relationship with it is officially over.

8. Confirm the old loan is closed

You don’t want any loose ends here. Ensure your old loan is fully paid off and closed out – sometimes, this involves contacting your lender to double-check. You don’t want any surprise bills from an old loan creeping up on you.

9. Start making payments on new loan

Congrats! Your new loan is up and running. Mark your calendar for your new payment due dates and get into the groove of making payments. And remember, this new loan should be more favorable – lower payments, a better rate or both.

What lenders allow refinancing?

Not all lenders are created equal when it comes to refinancing. Some will only refinance loans they’ve issued, while others are cool with refinancing loans from anywhere. Before applying, check the lender’s policy to avoid wasting time. Below you can get started on finding offers from trusted lenders and some details that may help you:

When to refinance a loan

Timing is everything in life – and refinancing. Here are a few signs it’s time to make your move.

• Lower interest rates: If market rates have dropped significantly below your current loan rate, refinancing could help you secure a better deal and reduce the total cost of your loan over time.
• Your credit score has improved: If your score has increased since you first got your loan, you could qualify for better rates and save money.
• Your income has increased: With a higher income, you may qualify for better terms and rates, plus lenders will view you as a lower-risk borrower since you have more resources to make payments.
• You need lower payments: Refinancing can extend your loan term and lower your monthly payments, giving you more budget breathing room.
• You want to pay off the loan faster: Alternatively, you can refinance to a shorter term and eliminate that debt sooner.

When you should wait to refinance a personal loan

But hold up – refinancing isn’t always a slam dunk. Here’s when you might want to hold off.

• You can’t get a lower interest rate: Refinancing won’t save you money if your credit hasn’t improved or market rates aren’t better.
• You may pay additional fees: Some lenders charge origination or prepayment fees that could affect your savings.
• Your loan balance is low: Refinancing might not be worth the hassle if you’re close to paying off your current loan.
• Your loan term is almost finished: Same idea here – if the end is in sight, refinancing won’t make a huge impact.

Recommended: When Should You Refinance a Car Loan?

The bottom line: Refinance smart

Whether you’re looking to lower your payments or crush your debt faster, refinancing a personal loan could be your ticket to a better financial future. Just weigh the costs and benefits and be sure to shop for the best deal for your finances.

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