Aug 01, 2023
You might be familiar with the concept of refinancing a mortgage. But did you know there are also ways to refinance a personal loan?
Refinancing a personal loan may be a good financial option if you want to borrow more funds. Or it could help you lower your interest rate and your monthly payments, especially if your credit has improved.
In this article, we will explain what personal loan refinancing means, how to do it, and why you might consider it.
There are several reasons to consider refinancing a personal loan:
Similar to refinancing a mortgage, when you refinance a personal loan, you take out a new loan to pay off an existing loan. You would then pay down the new loan, which would have new repayment terms and a new interest rate—ideally more favorable than before.
You may be able to refinance with your current lender or work with a new lender. If you’re approved, the lender will loan you the money you need to pay off the current balance on your existing loan. Depending on your credit, you might even qualify for a higher amount than your current loan.
There are several steps to refinancing a personal loan:
1. Decide how much you want to borrow
It might seem obvious, but before you shop for a new loan, decide how much you want to borrow. Figure out how much is due on your existing loan and if you want to borrow more money on top of that. Don’t forget to add in any prepayment penalties your lender might charge. Discover® Personal Loans never charges a prepayment penalty.
2. Check your credit score
You’ll want to check your credit score to see if it has improved since you took out the original loan. Lenders rely on credit scores to give them a measure of your creditworthiness. A higher score could help you get a lower interest rate on your loan.
There are many ways to improve your credit score. Here are some of the most common ones:
For more ideas, read 8 Facts You Need to Know About Your Credit Score.
3. Shop around for a new loan
Some lenders, like Discover Personal Loans, let you check your rate with a “soft inquiry” or “soft pull.” A soft pull helps you see how much money you might be able to borrow, the interest rate, and the repayment term without any impact on your credit score.
Be sure to look for loans that don’t have hidden costs. Any extra fees can increase your monthly payments. Some lenders charge origination fees and other costs, all of which add to the total cost of your loan. Discover Personal Loans never charges additional fees, as long as you pay on time.
4. Apply for a new loan
Gather all the documents you will need to submit to apply for a new loan. You might need your Social Security number, pay stubs, bank statements, and tax returns. Organizing this information before you start the application will save you time. For more details on the application process, read How to Apply for a Personal Loan.
5. Make payments on your new loan
Your new lender will pay off your existing loan as part of its approval process. Then you will begin making payments on your new loan. Consider setting up automatic payments so you never miss one.
One option is to pay off your balance with a different type of loan. For example, a cash out mortgage refinance is a secured loan that uses the equity in your home to pay off your original loan. That means you could lose your collateral—your home, in this case—if you have trouble repaying the new loan. That’s why refinancing a personal loan with another unsecured personal loan may be a better course of action.
If you’re having trouble making your current loan payments and refinancing isn’t an option, your lender may have a solution for you, especially if you’re in good standing with them.
1. Can a personal loan be refinanced?
Yes. To refinance a loan, you get a new loan and use those funds to pay off your existing loan. From then on, you will pay off the new loan.
2. When should you think about refinancing a personal loan?
Refinancing makes the most sense if you can get a new loan with a lower interest rate or a shorter repayment term that will allow you to pay off your loan faster. Another reason to consider refinancing a personal loan is to borrow additional money.
3. Will refinancing a personal loan hurt your credit?
To fully approve you for a refinance of your personal loan, a lender will eventually perform a “hard credit inquiry,” which may temporarily impact your credit score (but not always).
4. Are there alternatives to refinancing a personal loan if I am experiencing financial hardship?
If you need short- or long-term payment assistance, your lender may be able to help depending on your personal financial situation. Whatever the challenge, call your lender first. Explain your situation and ask about their repayment assistance program. Note that some lenders may only allow you to get payment relief if your account has been active for a minimum period of time.
You may also consider addressing your debt with an independent party in the case of financial hardship. The National Foundation for Credit Counseling provides credit and debt counseling including guidance and solutions to financial issues and a plan to prevent future problems specific to your situation.
A loan you took out a few years ago may have worked well for you then. Today you may have other needs and refinancing might make sense. You may be able to borrow more money, lower your interest rate, or get a longer repayment term. Whatever the reason, refinancing could help you reach your financial goals faster.
Articles may contain information from third parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third party or information.
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