How Soon Can You Refinance a Personal Loan?

You can refinance at any time. But refinancing pays off your current loan, and for some personal loans, early repayment triggers a prepayment penalty. Refinancing your personal finance loan can save you money on interest or reduce your payments to make them easier on your budget.

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Key Takeaways

• Refinancing replaces your current personal loan with a new one that has better terms. You can lower your interest rate, reduce your monthly payments or consolidate multiple debts into one loan.

• It makes sense when your credit score or income has improved, or when market interest rates have dropped. Avoid refinancing if your loan is almost paid off or if prepayment penalties and fees outweigh the savings.

• Check your loan documents for prepayment penalties, then compare rates from multiple lenders before applying to make sure refinancing will save you money.

What Does It Mean To Refinance a Personal Loan?

Refinancing a personal loan means replacing it with a new loan. You use the new loan to pay off your existing one. Then you pay the new loan according to your loan agreement.

A personal loan refinance can benefit you in several ways:

• Lowers your payments by reducing your interest rate or giving you more time to pay

• Switches you from a fixed rate to an adjustable rate, or vice versa

• Earns rewards for combining the loan with the lender's other products

You can refinance your personal loan with your current lender or go with a new one to get the best combination of rates, terms and other loan features.

Signs You Might Be Ready To Refinance

If any of the following situations apply to you, you might benefit from a personal loan refinance.

1. Your Credit Score Has Improved

Your credit score is one of the most important factors affecting your interest rate. If your credit score has improved since you took out your personal loan, refinancing could get you a better rate.

2. You're Making More Income

Income is another important factor influencing your personal loan rate. Higher income allows lenders to offer you lower rates — as long as your debt hasn't increased along with your income.

3. Interest Rates Have Dropped

Lenders base their rates on national interest rate benchmarks, such as the prime rate. If the national rate has dropped since you took out your loan, it's likely that personal loan rates have also fallen.

4. You Want To Consolidate Debt

You might have different types of debt, like credit cards, beyond your personal loan. If you find you're having trouble managing multiple payments, consolidating the debt might help you out.

How To Calculate Your Break-Even Point

Refinancing only makes sense if you save more than it costs.

• Simple rule: Savings from lower APR - fees = true benefit

Example: If refinancing lowers your interest costs by $1,200 but fees total $400, your net savings would be $800.

When Not To Refinance

The following situations are signs that you should keep your existing personal loan instead of refinancing it.

1. Your Credit Has Dropped

A drop in credit score could jeopardize your ability to qualify for a new loan or a better interest rate.

2. You're Near the End of Your Loan Term

Most of your loan payments go toward interest in the early years of a loan because your principal balance is higher. Near the end of your loan term, most of each payment goes toward principal, so the balance drops faster.

Starting over with a new loan brings you back to paying mostly interest and can significantly increase your total loan costs.

3. Prepayment Penalties Are High

Some bank loans will charge a prepayment penalty to make up for the interest they lose if you pay your loan off early.

If your loan has a prepayment penalty, you'll find it noted in your loan documents, along with how long it lasts. It might be in effect for the full loan term, for example, or just some portion of it.

4. You Won't Save Enough To Justify the Fees

Some personal loans have origination, documentation and other fees. If your refinance loan is one of them, the costs could outweigh the benefits of refinancing.

5. You're Applying for a Mortgage Soon

Mortgage approvals and interest rates are heavily dependent on your credit score and debt-to-income ratio. Both can be adversely affected when you apply for and receive a new personal loan.

When To Refinance vs. When Not To Refinance a Personal Loan

Here are both options in a nutshell:

How To Refinance a Personal Loan

Here's what you'll need and the steps to follow to get a personal loan to refinance your existing loan.

What You'll Need

• Government-issued ID

• Recent pay stubs

• Bank statements

What To Expect

• Prequalification may use a soft credit check

• Final application typically requires a hard credit inquiry

• Funding can take a few days after approval

Steps To Follow

1. Check your loan agreement to see if you have a prepayment penalty. If so, decide whether it's worth paying.

2. Shop around for better rates and terms.

3. Select a few lenders with rates and terms you like, and fill out prequalification requests to get rate quotes from each — but only if the website states that there's no impact on your credit.

4. Submit a loan application to your preferred lender, along with any documents the lender requests.

5. After your application has been approved, sign the loan documents to accept the loan.

6. Pay off your existing loan with the new one.

Pros and Cons of Refinancing a Loan

Consider the pros and cons of a personal loan refinance before you apply.

What Happens When You Refinance a Personal Loan?

Refinancing a personal loan has several immediate effects:

• Your old loan gets paid off

• You start making payments on the new loan

• Your credit report reflects the status of both accounts

Alternatives to Refinancing

Refinancing might be the best way to manage your personal loan, but it's always a good idea to consider other options.

• Request hardship assistance: If your payments are unaffordable, tell your lender. It might reduce your rate, extend the term or let you defer a few payments to get caught up.

• Make extra principal payments: Making extra principal payments saves you money on interest and pays your loan off faster.

• Use a balance transfer credit card: If you have a credit card with a 0% promotional rate or a lower standard rate than you're paying on your personal loan, and your credit limit allows it, consider transferring the loan balance to the card. Just be aware that you'll likely pay a possible balance transfer fee.

• Consider a debt consolidation loan: A debt consolidation loan is simply a personal loan. But instead of paying off just one debt, you use it to consolidate two or more debts.

• Use home equity: If you own your home and have available equity, you might be able to borrow against it to pay off your personal loan. Just be aware that defaulting on a home equity loan has much more serious consequences than defaulting on a personal loan. You could even lose your house.

Refinancing a Loan FAQs

Still have questions about refinancing a loan? Here are answers to some of the most common ones:

Can I refinance a loan with the same bank?

Not always. Some lenders only refinance loans from other lenders.

Will refinancing hurt my credit score?

Refinancing could potentially hurt your credit score because there's a hard pull on your credit and there are the effects of overlapping loans, even briefly. Having a new account can also lower your credit score.

Is there a limit to how many times I can refinance?

There might be a limit to how many times you can refinance if you use the same lender. Otherwise, you're limited only by your credit and other factors that can affect your eligibility to get a loan.

Should I refinance if I'm trying to pay off my debt faster?

If you're trying to pay off debt faster, you could possibly get a lower rate if you refinance. As an alternative, it might be better to make extra payments on the principal to really bring down that debt.

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