Can You Refinance a Personal Loan?
If you’re reading this article, then you’re probably wondering, “Can you refinance a personal loan?”
Yes, you can!
In this guide, I’ll walk you through a five-step process that’ll allow you to refinance your personal loan in no time.
When I took out my first personal loan for a car, I had a credit score of 640 and paid a ridiculous 15% interest rate. This was almost double the average rate of 8.06%!
Finally, after I improved my credit score, I qualified for a better rate. So I contacted my bank, and within days, I cut my interest rate in half.
I shared this story to show you the power of loan refinancing.
Keep reading to find out what refinancing means, when to refinance, and, most importantly, how to refinance a personal loan.
What Does it Mean to Refinance a Personal Loan?
Refinancing means trading your old debt for a new loan with better terms, conditions, and interest rates.
Let’s say you owe your credit card company $5,000 at 20% interest. This interest rate will leave you in debt for years.
So, instead of paying the 20% interest rate, you take out a different $5,000 personal loan at a 12% interest rate. Then you pay off your old, high-interest loan with your new, lower-interest loan.
A common question people ask is, “Can you refinance a personal loan with a new one from the same lender?”
The answer is yes! This is because your credit score or monthly income might have gone up from the time you originally took out the loan, allowing you to qualify for better interest rates.
When to Refinance a Personal Loan
Refinancing personal loans isn’t for everyone.
If you’re buying things you don’t need, refinancing isn’t for you. That’s because it’s an easy way to land in more debt.
Refinancing is an excellent option if:
- You want to consolidate debt
- Your credit score improved
- You want to switch to a fixed-interest rate
You Want To Consolidate Debt
Debt consolidation is when you combine multiple debts into one loan. When you refinance a loan, you have the option of taking out additional funds to pay off various debts.
Typically, borrowers will take out a low-interest loan to pay off high-interest debt. This can potentially save thousands of dollars.
Your Credit Score Improved
Let’s say you took out a personal loan a few years ago when your credit score was 650.
At the time, you could only qualify for a high-interest rate. But after working on your credit, you now have an 800 score, allowing you to qualify for personal loans at 10% interest.
It would be wise to refinance your old personal loan at a lower interest rate to help you save money.
You Want To Switch To A Fixed Interest Rate
Variable interest rates are a real headache. Yeah, you might benefit in a declining interest rate market, but if rates go up, you could easily end up paying double your original interest within a few months.
If you’re looking for a more stable rate, refinancing to a fixed interest rate is a good option.
Most lenders will let you take out a fixed-interest rate loan and pay off your variable-interest debt, so you won’t have to worry about fluctuating rates again.
How to Refinance a Personal Loan
Follow this five-step plan to refinance your personal loan hassle-free.
- Check your credit score
- Compare offers from lenders
- Review your loan
- Close out your original loan amount
- Start making payments on your new loan
Step 1: Check Your Credit Score
The biggest mistake I made when I took out my first personal loan was not working on my credit score. For a clearer understanding of personal loans and some common errors to avoid, read my guide covering how to get a personal loan.
To avoid paying unnecessary interest, pull your credit report from one of these major credit bureaus:
It’s free, and you’ll get an idea of interest rates to expect. A good interest rate on a personal loan is anything below 15%. If you find your credit score doesn’t allow you to qualify for this rate, be patient, and focus on improving it.
Remember, this score isn’t always 100% accurate. I’ve found errors in my report. If you see a missed payment or bill that’s against your name and shouldn’t be there, feel free to dispute it.
Step 2: Compare Offers From Lenders
Once you have a good credit score (680-739), it’s time to apply for loans and compare offers from lenders. It costs more to borrow money than to spend it, so avoid going with the first bank willing to give you money.
When talking to a potential lender, tell them upfront that you’re willing to go with another lender if you don’t like their interest rate.
But you also don’t want to focus on the interest rate too much. Some lenders give low-interest rates to make a deal look attractive, but the fees are outrageous. So consider the interest rate plus annual fees, known as APR (Annual Percentage Rate).
Something else to watch out for is the type of interest rate your lender provides. Some lenders start off with a low-interest variable rate. Avoid this because it means your interest rate will change over time. For instance, you might be paying 10% interest right now, but after several months, this figure could jump up to 15%.
Stick to fixed interest rates because your repayment amount will stay the same regardless of how the economy is performing.
Step 3: Review Your Loan
Like mortgages, vehicle financing, and debt consolidation, it takes a lot of time and hard work to refinance a personal loan. The process is filled with paperwork, and everything must be reviewed before you can finalize the loan.
On top of all this paperwork, you’ll have to hand over information like your credit report, proof of income, proof of residence, and your employer’s information.
Step 4: Close Out Your Original Loan
If you’re refinancing your loan with the same lender, they will close out your previous loan for you. But if you’re with a new lender, you must close out your old loan.
So let your old lender know that you’re refinancing and close it out soon after your new lender wires the total to your bank account. Be aware that some lenders will charge prepayment penalties. Ask your current lender about any fees prior to closing your loan.
Step 5: Start Making Payments On Your New Loan
Now that you’ve paid off your loan, the last step is to start making payments on your new loan.
Pro tip: Some lenders will lower your interest rate if you sign-up for auto-pay. Be sure to check with your lender to find out if they have this offer available.
Pros and Cons of Refinancing a Personal Loan
Here are some advantages of refinancing personal loans, as well as drawbacks to consider.
|Chance to pay less in interest.||Tedious research and paperwork.|
|In the long term, refinancing boosts your credit score.||It lowers your credit score initially.|
|You can lock in a fixed interest rate.||You may incur a prepayment penalty depending on your previous lender.|
Commonly Asked Questions About Can You Refinance a Personal Loan
Does Refinancing Hurt Your Credit Score?
Refinancing will hurt your credit score temporarily. But as you pay off your loan, you’re showing the credit bureaus that you’re a responsible consumer, which eventually raises your score.
Refinancing With a Personal Loan vs Balance Transfer Credit Card
With refinancing, you can only pay one debt. If you’re paying multiple loans, a balance transfer credit card is more beneficial. It puts all your credit card debt into one account, streamlining monthly payments. In addition, balance transfer credit cards often offer an initial interest-free period.
Can You Renegotiate a Personal Loan?
It’s possible to renegotiate your personal loan’s terms and conditions because your lender doesn’t want you to default. So if you’re struggling to pay your loan, contact your lender for better rates, a more flexible payment plan, or fewer fees.
Can You Refinance a Personal Loan for Lower Interest?
You can refinance a personal loan for lower interest. For example, let’s say you initially took out a loan when your credit score was 650, but your score is now 800. Feel free to use this to your advantage, as you now qualify for lower interest rates.
Is it Good to Refinance a Personal Loan?
Refinancing is a good idea if you’re consolidating debt or want to switch to a fixed-interest loan. But if you’re refinancing because you want to buy products you don’t need, it’s an easy way to land in more debt.
Can You Refinance a Discover Personal Loan?
Are you wondering, “Can you refinance a personal loan with Discover?” In short, if your credit score improves over time, then yes. Discover will allow you to refinance your personal loan with a lower interest rate.
How Long Does it Take to Refinance a Personal Loan?
Refinancing a personal loan takes around 30 to 45 days, depending on your lender. During this time, you’ll have to submit documents like proof of income and employer information. Banks will also conduct credit checks, and it takes a few days to close out your previous loan.
Can You Refinance a Personal Loan With the Same Bank?
Yes. It’s possible to refinance a personal loan with the same bank. Your bank might even encourage you to do so as it increases the likelihood of repayment. When refinancing with the same bank, show them that your credit score improved and that you now qualify for lower-interest loans.
Do You Get Money When You Refinance a Personal Loan?
If you’re refinancing with the same lender, you won’t actually receive money since your lender will close the previous loan themselves. But if you’re refinancing with a different lender, they’ll wire the money to your account. From there, it’s your responsibility to pay off the old loan.