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How to Refinance a Personal Loan

Matthew Levy Updated: December 3, 2023 • 4 min read
refinance personal loan

Refinancing a personal loan involves taking out a new loan with different terms to replace an old one. Some key reasons you might consider refinancing your personal loan is if you can get a loan with a better interest rate, or, if you need to change your repayment schedule to a shorter or longer period.

Pros and Cons of Refinancing a Personal Loan

Refinancing a personal loan comes with its advantages and disadvantages. To help you better understand whether refinancing is the right option, let's examine the pros and cons.


  • Lower interest rates: Refinancing can potentially secure a lower interest rate, reducing the overall cost of the loan and saving you money in the long run.
  • Reduced monthly payments: Refinancing for a lower rate or extending the loan term can make your monthly payments more manageable.
  • Ability to change loan term: Depending on your financial goals, you may shorten the repayment period to pay off the loan faster or extend the term to lower your monthly payments.
  • Debt consolidation: Refinancing can help you consolidate multiple debts into a single loan, simplifying your monthly payments and potentially lowering your interest rate.


  • Fees and costs: Refinancing may involve fees, such as application, origination, or prepayment penalties, which could offset the potential savings. Fees can add up to 1 to 10% of the total loan amount. For example, if you're refinancing a $10,000 loan, fees may be between $100 to $1,000.
  • Credit score impact: Applying for a new loan involves a hard credit inquiry, which may temporarily lower your credit score.
  • Longer repayment period risks: Extending the loan term can lower your monthly payments, but it may also increase the total interest paid over the life of the loan.
  • Difficult to qualify: It may be hard to find a lender if you have a poor credit score.

When considering refinancing a personal loan, weigh the pros and cons carefully, and evaluate how the decision aligns with your financial goals and circumstances.

refinance loan term

Step-by-Step Guide to Refinancing a Personal Loan

If you've determined that refinancing is right for you after considering your current loan terms, interest rates and monthly payments, here are the steps to take:

  1. Compare lenders and offers: Research various lenders and their refinancing options, paying close attention to interest rates, fees, and terms. Look for lenders with flexible options and competitive rates for low-income borrowers.
  2. Prequalify: Most personal loan lenders will allow you to prequalify for a loan to determine if you are eligible. Prequalifying can be a great option as it will give you an idea of the loan terms and will not hurt your credit score.
  3. Complete the application: Once you've identified the best offer, submit your application and provide any necessary documentation. This can include pay stubs, tax returns and bank statements.
  4. Get the funds: If your refinancing application is approved, review the new loan terms carefully and sign the agreement. Note that some refinancing lenders will place the funds in your bank account, while others will automatically initiate a transfer to your old loan.
  5. Start making monthly payments: Most likely, you'll be making automatic monthly payments from your bank account.

Remember to double check that your old loan is closed out and that there is no balance left, as this could carry additional fees.

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When Should You Refinance a Personal Loan?

You should consider refinancing a personal loan when you can obtain a lower interest rate or better loan terms that can save you money over the life of the loan. You can consider the refinancing if:

  • Your credit score has improved: If you've been making timely payments, keeping your credit utilization low and correcting any errors on your credit report, it's possible that your credit score has improved. You may then be eligible to receive a lower rate on a new loan.
  • You can get a better interest rate: Monitor market interest rates to identify the optimal time to refinance. Refinancing is generally more beneficial when interest rates have decreased.
  • You need to change the loan terms: If your income situation has changed and you can afford to pay off your loan faster than your current repayment term, you can refinance so that you can save money on interest.

Remember, refinancing a personal loan may not be the best option for everyone. Carefully consider your unique financial circumstances and needs before making a decision.

prequalify for refinancing


Refinancing a personal loan can be beneficial if it helps lower your interest rate, reduce monthly payments, or improve your overall financial situation. For low-income borrowers, it's essential to be proactive in monitoring interest rates, improving your credit score, and comparing various lenders and their offers. Understanding the basics of refinancing and considering the pros and cons will help you make an informed decision.

Remember that refinancing is not a one-size-fits-all solution, and evaluating your unique financial circumstances is crucial before taking any action. By following our step-by-step guide and being mindful of your financial goals, you can determine whether refinancing your personal loan is the right decision for you.



How long do you have to wait before refinancing a personal loan?

There is no specific waiting period for refinancing a personal loan. However, it's generally recommended to wait until your credit score improves, interest rates decrease, or your financial situation changes in a way that makes refinancing beneficial.

Does refinancing a personal loan affect your credit score?

Refinancing a personal loan can temporarily impact your credit score. Applying for a new loan involves a hard credit inquiry, which may cause a slight dip in your score. Additionally, closing an existing loan and opening a new one can affect your credit. Refinancing may improve your credit score if it helps you make on-time payments and lowers your credit utilization ratio.

Can I get another personal loan if I already have one?

Yes, it is possible to obtain another personal loan even if you already have one. However, lenders will consider your debt-to-income ratio, credit score, and repayment history on existing loans before approving a new one.

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Written by Matthew Levy

Matthew is a freelance financial copywriter with 14+ years in financial services. He holds a Bachelor of Science degree in Economics with business and finance options and is a CFA Charterholder. He is from Vancouver, Canada, but writes from all over the world.