Can You Refinance Your Personal Loans?
When you took out a personal loan, you took it out for a specific purpose. Whether it was consolidating other loans or paying for home improvement, you had a plan for the money and a plan for paying it off.
However, in life, things change. A few years down the road you might find that you need some help, flexibility, or more time to pay off your personal loan. If you find yourself in that situation, refinancing can help you manage your monthly payments.
Can You Refinance?
Yes, it is possible to refinance a personal loan, just like you can refinance nearly any other type of debt.
You can refinance an existing personal loan by taking out a new personal loan in the amount of your loan’s current balance.
It might be possible to refinance a personal loan by transferring the balance to credit cards, but that is more difficult to do and less common.
Why Would You Refinance a Personal Loan?
There are a number of reasons you might want to refinance a personal loan.
Difficulty making payments
The most obvious is that your financial situation has changed and you’re having trouble making the monthly payments.
If you lose your job or have another large monthly bill appear due to an unexpected event like medical issues, you might not have the spare cash to make payments on the loan.
The benefit of refinancing in this situation is that you can refinance into a loan with a longer term.
If you have 18 months left on your original loan, you can refinance to a loan with a 36, 48, or 60-month term. You’ll be in debt for longer, but you’ll have to pay much less each month. That means you won’t default on the loan, incur heavy fees, and damage your credit.
Curious how much your new monthly payments might be after refinancing your personal loan? Check out our personal loan calculator to give you an idea of how refinancing can benefit you:
You want a lower rate
When you take out a loan of any type, one thing that impacts the cost of the loan is your credit score.
The lower your score is, the riskier it is for a bank to lend money to you. To make up for the increased risk, lenders will charge more interest to people with poor credit.
Similarly, if you don’t make a lot of money, it can make lending to you riskier. The more you make, the less risky a borrower you are, so lenders can offer more attractive interest rates.
If you take out a long-term personal loan at a time when you have poor credit you could wind up paying a huge interest rate. If your income or credit increases drastically during the life of the loan, refinancing could let you get a lower interest rate.
If you do refinance to get a lower rate, you’ll save money and reduce your monthly payment, even if you keep the same term on your loan. Just keep in mind that you might be charged fees to refinance, could reduce the amount that you’ll save.
Increase Your Chances of Approval for New Personal Loan
When you refinance a personal loan, what you’re really doing is applying for a new loan that you then use to pay off the old loan.
That means you have to go through the application and approval process again.
Even though you’ve done it before, it can’t hurt to take some steps to improve your chances of getting approved for a refinancing loan.
Improve your credit
The biggest thing that you can do to improve your chances of getting any loan is improving your credit score.
Your credit score is made up of five different factors:
The biggest portion of your credit score comes from your payment history. The better you are at making on-time payments, the better your score will be.
If you’ve spent the entire term of your loan thus far making payments on-time, and you’ve never missed a payment, your score may be significantly higher than when you first applied for the loan.
However, just one missed or late payment can significantly reduce your score. If you have a long-term loan, making every monthly payment on-time is a great way to boost your score.
Another major aspect of your score is your credit utilization. This is comprised of both the total amount of debt you have and the ratio of your debts to the credit available to you.
The less debt you have and the lower your credit utilization ratio, the better. In the short-term, you can boost your score by avoiding using credit cards and paying down your existing debts.
Finally, avoid new credit inquiries that result from applying for too many loans. Each time you apply for a loan of any kind, it hurts your credit score a little bit.
Reduce your debt-to-income ratio
Another thing you can do to improve your chances of getting approved for a refinancing loan is to reduce your debt-to-income ratio. This is the ratio of your total debt to your annual income.
Lenders look at this number because it provides a look at how much of your budget is tied up in loan payments.
If you don’t have much money left over each month to make payments on a new loan, lenders will be wary of giving you a new loan.
You can reduce this ratio two different ways.
Pay down existing loans
This has the extra benefit of reducing your credit utilization and improving your credit score, giving your application a double boost.
Raise your income
You can do this by working for a raise or promotion at your current job or getting a side job. If you decide to pursue a second or side job, make sure that the income is documented. Under the table, income won’t be considered by lenders when you apply for a loan. Some lenders will require documentation to show the income that you claim on your application.
Other factors under consideration
Some lenders look at other factors, like your employment history, education, and savings patterns.
If you have a steady job or significant education, look for lenders who take these things into account.
They can make up for a mediocre credit score, or get you an even lower interest rate.
Remember to Check the Fees
Remember that many lenders will charge fees if you want to refinance your personal loan.
Common Personal Loan Fees
| Type of fee | Typical cost |
|---|---|
| Application fee | $25 to $50 |
| Origination fee | 1% to 6% of the loan amount |
| Prepayment penalty | 2% to 5% of the loan amount |
| Late payment fee | $25 to $50 or 3% to 5% of monthly payment |
| Returned check fee | $20 to $50 |
| Payment protection insurance | 1% of the loan amount |
One very common fee is the origination fee, which is charged as a percentage of the amount that you borrow.
Example: If you refinance your loan into a new $10,000 loan that has a 4% origination fee, the balance of your new loan will actually be $10,400. You’ll have to make monthly payments and pay interest on that balance rather than just the $10,000 you borrowed.
You might also see fees for early repayment of your new personal loan. If you’re refinancing to save on interest and want to pay your loan off early, makes sure the loan you apply for doesn’t penalize you for paying the loan off early.
Finally, keep the fees for things like late payment in mind. Though you never want to pay a late payment fee, it might happen, so try to find a lender who keeps these fees low if you can.
Make sure you’re not refinancing into a loan that will be more expensive than your current loan unless you really have to.
Research Other Lenders
When you’re refinancing, don’t be afraid to refinance with a new lender. Refinancing gives you the chance to change almost anything about your loan.
When comparing lenders here are things to look for:
Borrowing amount
Make sure that the lender you’re looking at will lend the amount you need. Some lenders won’t lend less than a certain amount, or more than a certain amount. If you need a relatively small loan, like $2,000, or a huge one for an amount like $75,000, that might limit your choice of lender.
Borrowing period
Relatedly, make sure the lenders you’re looking at offering a term you’re comfortable with. Some lenders specialize in short-term loans, while others have long-term loans.
Interest rates
compare the interest rates charged by different lenders. You want to choose the lowest interest rate possible so that you can avoid overpaying for the loan. Just make sure you don’t choose a loan with a very low interest rate but high fees.
Fees. We've mentioned this before -- it adds to the total cost of the loan.
Conclusion
Refinancing a personal loan can help you save money by reducing your interest rate. It can also give you more time to pay off a loan if you’re having trouble making ends meet. No matter what your reason for refinancing is, take the time to make sure you choose the best lender.
