How to Refinance a Personal Loan
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You refinance a personal loan when you replace your current loan with a new one. Ideally, the new loan has a lower rate or a more manageable payment. Refinancing could save you money if your credit has improved or rates have dropped, but fees or a longer term could erase those savings.
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Your personal loan suited your needs at the time, but something has changed. Maybe rates have dropped, your credit has improved, or the monthly payment doesn’t fit your budget anymore.
The answer could be a personal loan refinance. In the best case, it can reduce your rate and lower your monthly payments. When done wrong, however, it could cost you more than you save and leave you in debt for longer.
How do you decide the right move? Here's a look at when a refinance could pay off, how the process works, and what to check before you sign.
What it means to refinance a personal loan
To refinance a personal loan means to take out a new loan and use the proceeds to pay off your existing loan. From then on, you repay the new loan on its terms. The goal is to get better terms than you had originally.
A refinance changes the details of what you owe, not the fact that you owe it. The balance doesn't disappear. You move it to a new loan that ideally costs less or fits your budget better.
When refinancing a personal loan makes sense (or not)
A refinance pays off when the new loan genuinely improves your situation—and it's worth skipping when the math doesn't move in your favor. You have a few clear signals in each direction:
| A refinance may pay off when | It may be better to wait when |
|---|---|
| Your credit has improved since you borrowed | Your credit score has dropped |
| Market rates have fallen | Market rates have gone up |
| You want a lower monthly payment | Fees would cost more than you'd save |
| You want to pay the loan off faster | You're close to the end of the loan term |
| You want to switch from a variable rate to a fixed one | You've refinanced recently already |
It’s almost never a good idea to refinance to a loan that has a higher interest rate. If you can’t get a rate lower than you’re paying now, refinancing is probably not the right call.
Similarly, a refinance rarely helps when you're months from paying the loan off, since the fees and a new hard inquiry likely outweigh a rate cut.
Watch out for loans that appear to cost less but really don’t. Specially, a loan with a longer repayment term could have a lower monthly payment, but it costs more in interest overall. You also need to keep origination and other loan fees in mind, since these can easily add 10% or more onto the cost of the refinance.
Why a lower payment could cost more
A longer term lowers the monthly payment because you spread the balance over more time. Each extra month you take to repay the loan means another interest payment, though, which adds to the total cost.
Let’s look at a simplified example. Say you owe $10,000 at 15% with three years left, and you refinance into a five-year loan at 13%. Here's the numbers could play out:
| A refinance may pay off when | It may be better to wait when |
|---|---|
| Your credit has improved since you borrowed | Your credit score has dropped |
| Market rates have fallen | Market rates have gone up |
| You want a lower monthly payment | Fees would cost more than you'd save |
| You want to pay the loan off faster | You're close to the end of the loan term |
| You want to switch from a variable rate to a fixed one | You've refinanced recently already |
The lower rate trims about $119 off the monthly payment, which helps a tight budget. But stretching the balance over two more years adds roughly $1,172 in total interest. That’s on top of any origination or loan fees charged by the new lender.
How to refinance a personal loan, step by step
The process looks a lot like applying for your first loan, with a few extra checks. Here’s the basic order to follow:
- Get your payoff amount. Check your loan statement to see your remaining balance. It’s typically better to only borrow what you need to pay off your existing loan.
- Check for prepayment penalties. Check your loan agreement for any fees that apply to paying off your loan early. Most personal loans don't have one, but confirm before you move.
- Check your credit. Pull your credit report and score to see if your situation has improved. Stronger credit than when you first borrowed is generally the main thing that earns you a lower rate.
- Pre-qualify with a few lenders. Many lenders let you pre-qualify with a soft credit check to get an estimate of your personal loan rate and terms. A soft inquiry doesn't affect your credit score. Compare at least three offers on APR, fees, and funding time.
- Compare total cost, not just the payment. Run each offer through a personal loan calculator and look at what you'll pay in interest and fees over the full term, not only the monthly number.
- Apply. Choose a lender to formally apply. This step results in a hard inquiry, which can lower your score by a few points for a short time.
- Pay off the old loan. Some lenders send the money straight to your old lender, and others deposit it to you. Either way, confirm the old loan is closed and shows a zero balance.
- Set up autopay on the new loan. On-time payments protect your credit and keep you from missing the new due date.
What refinancing costs and how it affects your credit
The main cost associated with refinancing a personal loan is the origination fee. This is an administration fee some lenders charge to cover the cost of processing the new loan. Not all lenders charge loan fees, but those that do can run up to 12% of the loan amount.
Origination fees are typically taken out of the loan proceeds before they hit your account. For example, a $10,000 loan with a 5% origination fee would mean you receive just $9,500.
Refinancing has credit costs, too. Specifically, applying adds a hard inquiry, which can lower your score by a few points temporarily. Also, a new loan could drop your average account age, which may negatively impact your credit. On-time loan payments have a positive impact and could balance these small negatives over time.
How soon (and how often) can you refinance a personal loan?
You can usually refinance a personal loan as soon as you find a better offer. There's no universal waiting period, though some lenders want to see a few months of on-time payments first, so timing varies by lender. Check both lenders' rules before counting on a quick turnaround.
You can also refinance more than once. If your credit has improved or rates have dropped since the last time, a second refinance can still make sense, especially if you can get a loan with no origination fees.
If nothing has changed, refinancing likely isn’t worth it. And if you find yourself refinancing again and again, that could signal the debt is larger than your budget can handle. That's the moment to step back and look at other possible solutions.
Bills Action Plan
Ready to see whether a refinance fits? Start here.
- Pull your current payoff balance and check your loan agreement for a prepayment penalty.
- Pre-qualify with two or three lenders using a soft credit check, then compare APR, fees, and funding time side by side.
- Run the numbers on a personal loan calculator to confirm the new loan costs less over its full term before you apply.
Key Terms
Refinance: Replacing your current loan with a new one. You take out the new loan, use it to pay off the old, then repay the new loan on its terms.
Origination fee: An upfront fee some lenders charge to set up a loan, from 0% to 12% of the amount. When charged, it comes out of the money you receive.
Prepayment penalty: A fee some lenders charge for paying a loan off early. Uncommon on personal loans, but worth checking your contract.
APR: The yearly cost of borrowing. It includes the interest rate plus certain loan fees like origination charges. Use APR to compare loans across lenders, not just interest.
Loan term: How long you have to repay. Personal loan terms typically run two to seven years, though some lenders offer shorter or longer.
This article is for general education, not financial advice. Personal loan rates, fees, and terms vary by lender and are subject to credit approval. Compare offers and read the full terms before you apply.
What is the 2% rule for refinancing?
There's no official 2% rule for personal loans. The term comes from refinancing a mortgage: Aim to drop your rate by about two points. The idea is that you need to decrease your rate by at least two points for the savings to be worth the costs to refinance.
For personal loans, 2% might not be the line; the real test is whether your total cost goes down after fees, so run your own numbers.
Does refinancing a personal loan hurt your credit?
Yes, applying for new credit and opening a new account can both cause a small dip in your credit score. This is from the hard inquiry when you apply and a slightly younger average account age. On-time payments on the new loan could rebuild that ground over time.
What disqualifies you from refinancing a personal loan?
A personal loan refinance requires you to qualify for a new personal loan. You could be denied a personal loan for a lot of reasons, often because your credit or income doesn’t meet the lender’s requirements.
Can you refinance a personal loan with the same lender?
Yes, if the lender allows it. Some lenders will refinance your loan in-house, and others specifically don't allow you to use loan proceeds to pay off debt owned by that lender. The only way to know for sure is to ask your lender. Either way, compare outside offers first to make sure your current lender's deal is the best one.