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When should you refinance a loan?

A woman researches when she should refinance a loan
May 14, 2019

By Kathryn Pins

Refinancing a high-rate loan could help you save money on interest or make your monthly payments more manageable. Before jumping in, it helps to know your options and when you should refinance a loan. 

What is a loan refinance?

You can refinance many types of loans including auto loans, mortgages and student loans. When you refinance a loan, you close your old loan and open a new loan with a new term and a new rate. The old loan is paid off completely by the new lender so you won’t owe anything on your old loan. You’ll make your payments toward the new loan, which hopefully will have a better term and/or a better rate.

The process for refinancing a loan is simple. First, you’ll need to decide whether you want to shorten your term or lower your monthly payments, depending on your financial goals. After doing some research on lenders, you’ll submit a refinance application, usually online. In many cases, the lender will process your application and notify you if you’re approved the same day. Once you’ve read over your new terms and agreed, the lender will usually handle the messy details such as the payoff of your old loan.

When should you refinance a loan?

If you have multiple loans, are struggling to make payments, or have simply found a better rate, then a loan refinance could be for you.

When you refinance multiple loans into one loan, you’ll be able to consolidate your payments into one monthly payment. You won’t have to worry about having to make multiple payments on multiple loans with different due dates. People like to consolidate so they can better keep track of their payment progress and lessen the chance of missing a due date. All in all, having only one loan payment to think about can really make debt management easier.

You could also change your term by refinancing a loan. Shortening your term could increase your monthly payments so you can pay off your loan early, and in the long run, help you save money on interest. Lengthening your term could make monthly payments easier but could increase the amount you spend on interest over time. No matter what, try to find a loan that doesn’t have prepayment penalties. Without prepayment penalties, you can  make extra payments toward a loan with no extra fees.

Finally, a better interest rate could save you hundreds or thousands of dollars. If your credit score has improved and you have a long history of making payments on time, then your chances of getting a lower rate are pretty good. Again, it’s important to shop around for a great rate. If you’re interested in refinancing a mortgage, talk to a mortgage loan officer you trust about the current rate environment. No one has a crystal ball, but the right mortgage loan officer could help you understand how you could get the best interest rate on your mortgage.

When to think twice before refinancing a loan

Sometimes, sticking with your loan and not refinancing can make the most financial sense. If your remaining term is short, you can easily make the monthly payments, or your credit score has dropped, a refinanced loan may not help you.

Many people refinance a loan to save on interest or get a better interest rate. If you only have a couple of years left, you may not save a ton on interest. Many times, refinancing a loan comes with a service charge or fee, so the fee may not be worth the refinance.

Also, if your credit score has dropped, you may not get a better rate than the one you have now. It may be best to stick to your original lender until you can increase your credit score. (Contrary to popular belief, your payment history on your old loan will still count toward your credit score even after a refinance. Refinancing a loan does not erase any late payments that may have impacted your credit score.)


Kathryn Pins is a marketing content specialist at Alliant. She’s passionate about finding and communicating meaningful financial information with Money Mentor readers. Kathryn is a saver who gets more excited about certificates and her Roth IRA than shopping. When she does spend her earnings, it’s on furthering her education, travel, unique experiences, and loved ones.