Should I refinance my personal loan?

Personal loans can be a helpful financial tool, giving people the cash they need when they need it. From debt consolidation, home improvements, emergency expenses and more, many people have relied on a personal loan to finance those needs.

Already have a personal loan? You might miss out on an opportunity to save. Refinancing your personal loan could help you lower your monthly payments and secure better terms. Discover how personal loan refinancing works—and whether it’s the right move for you.

What you’ll learn:

• What does refinancing a personal loan look like?
• Potential benefits of refinancing a personal loan
• What to consider before refinancing a personal loan

What does refinancing a personal loan look like?

Refinancing a personal loan involves taking out a second personal loan with more favorable rates and terms and using those funds to pay off your first personal loan, potentially saving you money and improving your financial flexibility.

Potential benefits of refinancing a personal loan

Lower your monthly payment

The most obvious and often most important benefit to refinancing a personal loan is the opportunity to lower your monthly payments.

Imagine you took out a $15,000 personal loan with a 60-month term at 12% APR. This means your monthly payment would be about $334. You see another financial institution is advertising personal loans for 8% APR. You take out another $15,000 personal loan for 60 months at 8% APR, which equates to a monthly payment of about $304. You use this new personal loan to fully pay off your first one.

Now, all you need to worry about is your new monthly payment of $304 instead of your old payment of $334. That’s $30 in savings every month, just for refinancing your personal loan! Over a 60-month term, this is nearly $1,800 in savings.

Change your loan term

With a personal loan refinance, you can choose a new term length that better fits your current financial situation. If you initially took out a four-year term, your refinanced personal loan term can be shorter, the same or longer, depending on your preferences.

A shorter term is a great option if you want to pay your personal loan off faster. This may raise your monthly payments, but you’ll pay less in interest over the course of the loan.

Conversely, you can take out a longer term than you initially had. This can help give you breathing room in your budget, as it lowers your monthly payments, but you will pay more in interest over the term of the loan.

Of course, you can simply choose the same term you had before or the term closest to the length remaining on your initial personal loan. This option makes sense when your primary reason for refinancing it is to take advantage of a lower interest rate with your new personal loan.

Switching from variable to fixed rate

While most personal loans are a fixed rate, variable rate personal loans do exist. If you initially took out a variable rate personal loan, refinancing to a fixed rate loan can help simplify your budget. Since a fixed rate loan has predictable monthly payments, switching to one can give you peace of mind and confidence you’ll be able to pay back the loan.

What to consider before refinancing a personal loan

Fees and costs

Alliant personal loans have no origination fees, closing costs or prepayment penalties.

Some other institutions may charge fees or other costs associated with them. These can include origination fees or prepayment penalties, among others. Be sure to research the fees associated with both your initial personal loan and your potential refinanced personal loan to ensure fees aren’t erasing the benefit you’d otherwise get from refinancing.

Credit score

A higher credit score can help you qualify for better rates, so it’s a great practice to look up your score before attempting to refinance your personal loan. You are entitled to free copies of your credit report from Experian, TransUnion and Equifax (the three credit bureaus) every 12 months. You can request a copy from AnnualCreditReport.com.

When you refinance a personal loan, you’ll be applying for a new personal loan as part of the process, which typically means a hard inquiry on your credit report. This can temporarily lower your credit score. You’ll also be impacting your average credit age by paying off an older loan and taking out a new one.

Be sure to carefully weigh the potential impact to your credit score if you have plans to take out another loan soon, such as an auto loan or mortgage. If you won’t need to apply for another loan or credit application soon, the credit score drop from a new inquiry is typically short-lived.

Financial goals

Refinancing a personal loan should align to your financial goals. Whether this be paying off debt faster, improving your monthly cash flow through decreased monthly payments, or debt consolidation, the best way to refinance your personal loan is, well, personal. There’s no objectively right way to refinance a personal loan—it’s all about focusing on what helps you reach your financial goals.

Refinancing an existing personal loan can be a great way to lower your monthly personal loan payments, change your term to better align to your immediate financial goals and more. If you are currently paying off a personal loan, it’s worth checking to see if you can get better terms and a lower rate.