Can You Refinance a Personal Loan?

If you've ever borrowed money, you may have heard the term "refinancing" but are unsure what that really means. Can you refinance a personal loan? Is refinancing a loan a good idea? Let’s define this important financial option, look into whether you may want to consider it — and provide some helpful decision-making tips.

What is refinancing a personal loan?

When you refinance a personal loan, you basically get a new loan with new loan terms, and you use that money to pay off your existing loan. Some lenders, like OneMain Financial, use the term "loan renewal" to describe the same process. So, if you're looking into how to refinance a personal loan and come across information mentioning "loan renewal," just know that these terms essentially mean the same thing.

The benefit of refinancing a personal loan is to lower your monthly payments. How? Once you refinance or renew your current loan, your new loan may have a lower interest rate, which can save you money over the life of the new loan. You may also be able to extend the term of the loan, which can make your monthly payments more manageable. Just keep in mind that a longer loan term may result in paying more over the life of the loan. If you're considering renewing or refinancing a personal loan, be sure to compare offers from multiple lenders to get the best deal — and make sure you can afford the new monthly payments before moving forward.

When does refinancing a personal loan make sense?

Why refinance a personal loan? Here are a few common reasons:

• Your credit has improved If you’ve raised your credit score since opening your current loan, you may qualify for a lower interest rate on a new loan.

• You want a fixed interest rate Moving to a fixed rate from a variable rate may help you save money on interest, potentially lowering monthly payments.

• You'd like lower monthly payments A lower interest rate could decrease monthly payments. Extending your repayment term could also lower your monthly payments. Just keep in mind that a longer loan term means that you might pay more in total interest over the life of the loan.

• You found a better deal Research the best personal loan refinance offers from multiple lenders, including your current lender. If you find a deal that works better for your financial situation, go for it.

Advantages of refinancing a personal loan

While the pros of refinancing a personal loan depend your circumstances and goals, some popular advantages like these could be available:

• Lower interest rate — If your new loan offers a lower interest rate, you could save on monthly payments, which puts extra money in your pocket.
• Faster payoff — When you renew or refinance a personal loan and your new loan has a shorter repayment period, you can pay off your loan faster. This may increase your monthly payments, but you’ll hit that sweet $0 balance sooner.
• Longer repayment period — If you need extra time to pay off your loan, refinancing a personal loan can extend your repayment period.
• Fixed interest rate — Switching from a variable interest rate to a fixed-rate loan could give you lower monthly payments and the peace of mind of a stable, predictable payment amount.
• Additional funds — Could you use a little extra money? If approved for renewing or refinancing your loan, your current loan will be paid off, and any remaining cash is yours to use on just about anything you need to take care of.

Disadvantages of refinancing a personal loan

Refinancing a personal loan may not always make sense for your situation. Here are some common disadvantages to consider:

• Additional fees Before refinancing your personal loan, be sure to read the fine print about potential fees you may be charged by your current lender and new lender. These could include both origination fees and prepayment penalties for paying off your loan early.
• Paying more interest over time Extending your payments over a longer term may lower your monthly payments, but you will likely pay more interest over the life of your loan.
• Prolonged debt You should keep in mind that if your refinance includes a longer loan term, you’ll ultimately wind up staying in debt longer.

Steps to refinance a personal loan

Now that you know more about renewing or refinancing a personal loan and have decided to move forward, here’s how to refinance a personal loan:

- Calculate your new loan total

The first step to getting any loan starts with figuring out how much you need. Be sure to factor in any associated fees, such as prepayment fees from your current lender and origination fees from your new lender.

- Check your credit

Two big factors in getting approved for refinancing a personal loan are strong credit and a history of timely payments made on your current loan. Checking your credit, both your score and your report, will help you avoid surprises and fix any errors before you start the loan application process.

- Shop for offers

Creating a side-by-side list of lenders can help you compare interest rates, monthly payments, transaction fees and other loan features. Don’t forget that you can contact your current lender to explore options as well. Once your list is complete, use an online personal loan calculator to estimate monthly payments.

- Get your documents ready

Most lenders ask for similar documents for their application process. These typically include proof of identity, proof of residence, proof of income, a Social Security card and W2 form.

- Apply for a loan renewal or to refinance your loan

Once your preparation is complete, start the application process. Some lenders let you apply in person or online and give you an answer within minutes. If approved, you may be given the option of receiving your funds by check or direct deposit.

- Pay off your old loan and confirm that the loan is closed

When your new funds are available, pay off your old loan immediately. Some lenders may do this for you. Once the loan has been paid off, confirm that the account is closed and ask for a paid-in-full letter for your records. You should also check your credit report to verify that the loan has been paid and the account is closed.

- Manage your new loan

Make note of your new payment due date and the amount due each month. If your lender offers automatic payments, signing up could help you avoid potential late fees. Be sure to check for other convenient services like paperless billing, online account management, and a mobile app.

Is refinancing a loan right for you?

Still asking yourself, “*Should I refinance my loan?*” Exploring this option may be a good idea, depending on your situation. Refinancing could mean getting a lower interest rate or having a loan with a shorter term, or even both. However, be sure to think about all the pros and cons before you decide. Take your time and carefully consider the benefits and drawbacks before making your decision.

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This article has been updated from its original posting in 2022 and 2023. Jessica Leshnoff and Matt Diehl contributed.