Refinancing is taking out new debt in order to pay off old debt. The new debt should have fewer fees and/or more favorable repayment terms to make refinancing worthwhile.
If you have a personal loan with a high interest rate or otherwise unfavorable terms, you can refinance it with a new personal loan that has better terms, like a lower APR or a longer repayment period. You may pay less interest over time, or reduce your monthly payment, by moving the debt into a new loan.
Yes, many lenders offer the option to refinance a personal loan — but it’s best to check in with your lender to be sure.
Note that even though you could refinance a personal loan multiple times, each instance of taking out a new loan can temporarily hurt your credit score. Generally, requirements for refinancing include maintaining good credit and qualifying with the lender.
Before refinancing a personal loan, calculate how much it’ll cost — it helps to use a loan calculator — and consider any potential fees. For example, if your existing loan has a prepayment penalty for paying it off early and your refinanced loan would require an origination fee, costs can add up quickly.
You’ll also want to review your credit to see if you’d likely qualify for a new personal loan with competitive terms. You can get your credit score for free with LendingTree, and you can also access free credit reports from each of the three major credit reporting agencies (Experian, Equifax and TransUnion) via AnnualCreditReport.com. Since credit report errors can hurt your credit score, it’s important to ensure that there aren’t any before comparing lenders.
There are two common ways to refinance your debt: personal loans and balance transfer cards.
Personal loans can offer larger borrowing limits than a credit card, so taking one out is a common technique for combining multiple debts at once. Personal loans also have a structured payment plan with a single, fixed payment each month.
On the other hand, balance transfer cards can come with special offers, like a zero-interest introductory period. These cards let you pay down your debt without incurring high interest costs, as long as you pay off the balance in full before the introductory period ends. If you don’t, you could be charged interest on your remaining balance and wind up deeper in debt than before.
Once you’ve decided to refinance your loan, you’ll want to compare companies to see which has the most affordable option. Consider factors like the APR, fees, borrowing limits and repayment terms.
Make sure to watch out for origination fees, though. On a $5,000 personal loan, an origination fee of 5% would mean that $250 will be deducted from the deposit you receive from your lender.
If you decide to use a credit card, you’ll need to consider the typical 3% to 5% balance transfer fee. If you can pay off the balance transfer card during the introductory period, that fee may be worth it, but it will add to the debt in the short-term.
When you prequalify for a loan or credit card, lenders quickly assess your creditworthiness based on a few factors, like your income and savings. They’ll often also conduct a soft credit inquiry, which doesn’t affect your credit score.
You should always prequalify for refinancing debt, as this gives you the opportunity to see what repayment terms you could receive and compare offers from different lenders.
You’ll also want to compare your offers to your existing debt and decide whether refinancing makes sense for you. Make sure you understand exactly how much your newly refinanced loan will cost you, including interest charges, origination fees, your estimated monthly payment and any other costs.
When you’ve chosen a loan or credit card, you’ll submit a formal application. This will trigger a hard credit inquiry, which will negatively impact your credit temporarily. Lenders often request supporting documentation, such as copies of tax returns, pay stubs and bank statements.
If you’re approved, your lender may offer to transfer funds to your bank account, mail you a paper check or pay your creditors directly. Once you receive the loan, pay off your original debt quickly to avoid additional costs. Consider calling your old lender to ask them for the exact payoff amount to avoid paying more than you should.
Lastly, you’ll want to follow up with your old creditor to confirm that your debt was paid in full. Request that they send you a statement in writing.
| Pros | Cons |
|---|---|
Lower interest rates: Depending on your credit and financial profile, the lender and market conditions, you could receive a lower rate. Favorable loan terms: You may be able to find a longer loan term with a lower monthly payment, or a shorter loan term with lower interest paid overall. Fixed interest rates: Switching from a variable interest rate debt to a fixed interest rate loan allows you to plan your budget around a fixed monthly payment. | Additional fees: Taking out a new loan can come with added fees, like an origination fee. You may also be penalized for repaying your original loan early. Higher interest costs: If you’re struggling to make payments on your loan, you may find it helpful to refinance and get a lower monthly payment. However, extending your term could mean that you’ll pay more in interest over time. Need to qualify: If you’re struggling financially, qualifying for a new loan could be difficult. |
When applying for a new personal loan, lenders will often let you prequalify, which won’t impact your credit score. However, if you choose to proceed with the loan, you’ll be subject to a hard credit inquiry, which will temporarily put a slight dent in your credit score.
This may lower your chances of getting approved for new credit right after refinancing your personal loan. However, as you continue to pay down on your debt (and finally pay it off), your credit score will eventually bounce back.
To make our list, lenders must offer competitive annual percentage rates (APRs). From there, we prioritize lenders based on the following factors:
You can try. If you’re having trouble making loan payments, your lender may consider renegotiating your personal loan terms, especially if you’re in good standing with them. This process, called loan modification, essentially draws up a new contract to replace your old one.
When you ask to renegotiate a personal loan, you can request to lower your monthly payment, interest rate or principal balance, or a combination of the three. By making your loan more affordable for you, your lender hopes to reduce the chances of you defaulting on debt payments. However, lenders have no obligation to renegotiate your loan and may not consider it unless you can demonstrate some extenuating circumstances that prevent you from paying.
Modifying an existing loan usually doesn’t include fees, and you can put in multiple requests. However, each lender will have its own eligibility criteria when considering borrowers for loan modification, including meeting a minimum credit score and having a monthly income. Not everyone will qualify.
Similarly, you may be able to negotiate a lower interest rate on your credit card, especially on accounts you’ve had for several years. You can try to leverage your payment history and credit score.