If you are having trouble making payments on a personal loan, you may be able to refinance with a new loan with a lower rate or smaller monthly payments.
Here’s what to know about refinancing a personal loan, including how it works, the benefits and drawbacks and whether it might be the right move for you.
Can you refinance a personal loan?
What is refinancing and how does it work?
Refinancing means replacing an existing loan with a new loan with different terms, often a lower interest rate or a different repayment period or loan structure.
Refinancing is well-known in the mortgage and student loan space, but it can also be done for personal loans. People refinance for different reasons, including:
- Taking advantage of a lower interest rate.
- Getting smaller monthly payments.
- Shortening the payoff timeline.
- Releasing a co-borrower.
Refinancing to a longer repayment period can shrink your monthly bill, but it usually means paying more in interest over the life of the loan.
You may be able to refinance with your existing lender or work with a new one. In either case, there may be fees, so factor that into whether a new loan is the right financial choice.
Best Egg allows borrowers to refinance both secured and unsecured loans. Your original loan must be in good standing, with a positive payment history, and the combined balances can’t exceed $100,000.
Best Egg has competitive APRs for borrowers with goodcredit or homeownersinterested in asecured loan. But origination fees can be high and it doesn’t offer many other financial services.
- Secured loans have an average APR discount of 20% compared to unsecured loans.*
- Factors besides credit scores are considered when applying.
- Possible to get financing in as little as 24 hours.
- Vehicles and home fixtures can be used as collateral.
- The origination fee is higher than some competitors’ fee.
- Best Egg does not allow co-signers or co-borrowers.
*The Best Egg Secured Loan is a personal loan secured using a lien against fixtures permanently attached to your home such as built-in cabinets, light fixtures, and bathroom vanities. Rest assured, your home itself will not be used as collateral.
You can use a loan from PenFed Credit Union to refinance. With APRs capped at 17.99% and no origination fee, you’re more likely to save on the overall cost of borrowing.
PenFed approves borrowers for as little as $600, making it a good option if you don’t have a large balance to refinance.
Borrowers with good-to-excellent credit who want competitive rates andno upfront fees should consider PenFed. Its $50,000 loan cap means it might not be the right lender for larger expenses.
- Approves loans as small as $600.
- Membership available with a $5 deposit in a savings account.
- Can pick up a physical check at a branch.
- Can apply with a co-borrower.
- Maximum loan amount is $50,000.
- Generally need good to excellent credit.
- Most branches are in D.C., Maryland and Virginia.
How do you refinance a personal loan?
If you’re ready to refinance, follow these steps.
1. Check your credit and calculate the cost of borrowing
You’re in a better position to refinance if your credit score has improved since you took out your original loan. Review your score and check your credit reports for any errors or signs of fraud.
Also, confirm how much of the balance you’re paying off. Factor in any loan fees when you’re deciding how much money to request, to help decide whether it’s worth refinancing.
2. Prequalify and shop around
Most lenders will let you prequalify to get an estimate of the rates, terms and loan amounts you may qualify for. You can then use that information to compare offers from other lenders to find the right one.
You’ll need to provide some personal details — including your Social Security number, date of birth, income — as well as the loan amount and intended purpose. Prequalification only involves a soft credit inquiry, so it won’t impact your credit score.
Prequalification is a useful tool, but it’s not a guarantee of approval.
3. Gather your documentation and apply
Once you find the right lender, it’s time to complete a formal application. You may need to provide some additional documentation, including a government-issued ID, bank statements and recent paystubs.
Many lenders boast an application process that takes just a few minutes and you may get an approval decision the same day, but timelines can vary.
Most lenders allow personal loan funds to be used for almost any purpose, including paying off another loan, but confirm before applying.
If you are approved, look over the new loan agreement and make sure you approve of the terms before you sign. This process will trigger a hard credit inquiry, which can result in your credit score dropping a few points, so make sure this is the lender you want.
4. Pay off your original loan
Most lenders fund loans within one or two days of approval, and many advertise same-day deposits if you sign early enough in the day. If you are refinancing as part of a debt consolidation strategy, the lender may be willing to send payment directly to your original lender. Otherwise the money will be deposited into your account and you’ll use it to pay off your original loan.
Either way, you’ll want to get a paid-in-full letter to confirm the old loan has been paid off completely.
The due date for the first payment on your new loan will be listed on your loan agreement, but it’s typically within 30 days of funding.
Pros and cons of refinancing a personal loan
Pros
- Lower interest rate. If your credit score has improved or market rates have dropped, you may qualify for a lower APR.
- Lower monthly payments. You may be able to get a longer repayment term, giving you smaller monthly payments that work better for your budget.
- Faster payoff timeline. If you can afford larger monthly payments, you can pay off the debt quicker and save on total interest.
- Switch to a better lender. Refinancing gives you the chance to work with a bank with better customer service, fewer fees, an upgraded online experience or other benefits.
Cons
- Your credit score can dip. When you apply for the new loan, the lender will run a hard pull, which can lower your credit score several points temporarily.
- Additional fees. Many personal loans come with an origination fee, which can be as much as 10% of the amount you’re borrowing. And, though it’s uncommon, your original lender may charge a prepayment penalty for paying off your balance early.
- Paying more interest: If you refinance to extend your loan term and get lower monthly payments, you’re likely to pay more total interest over the life of the loan.
Should you refinance a personal loan?
Refinancing isn’t right for everyone. Before you make a decision, consider the following:
When refinancing makes sense
- Your credit score has improved. A higher score can help you qualify for lower interest rates, longer repayment terms and other benefits.
- Market interest rates have declined. If general interest rates have fallen below the rate on your current loan, refinancing can save you money.
- You want smaller monthly payments. Though it will add interest, refinancing to a longer repayment term can shrink your monthly payment. If your budget has tightened, this might be a good reason to refinance.
- You want to pay off the debt faster. Refinancing to a shorter term means a larger monthly bill, but less interest overall.
- You want to consolidate debt: If the personal loan is one of several outstanding debts you’re having trouble keeping on top of, rolling them into a single personal loan will simplify your monthly payments and could lower your blended interest rate.
When refinancing may not be the right choice
- You have poor credit. Subprime borrowers don’t qualify for the most attractive interest rates, so you’re not likely to save money by refinancing.
- The fees cancel out any savings. Personal loans can come with origination fees and other upfront costs, which can be fixed amounts or a percentage of the loan’s value. Make sure the fees don’t eat up any potential savings you were hoping to get from refinancing.
- You’re almost done paying off the loan. If you’re just a few months away from paying off your balance, it’s probably not worth the time, hassle, fees and credit check involved with a completely new loan.
Alternatives to refinancing a personal loan
If you want to change your rate or terms, refinancing isn’t the only option.
A debt consolidation loan
If you have numerous personal loans, you can use a debt consolidation loan to roll them into one monthly payment with a lower blended APR. The concept is the same as refinancing, but you’re streamlining multiple payments into one.
You can also roll in high-interest credit card bills into a debt consolidation loan.
Upstart approves debt consolidation loans for as little as $1,000 and considers factors beyond credit scores for approval, including work experience and education.
We like that Upstart considers factors besides credit score, including education, income and employment history. However, co-signers aren’t accepted.
- Accept applicants with bad or no credit
- Minimum APR is lower than many competitors’
- Approves personal loans up to $75,000
- Most loans are funded the next business day
- Origination fee of 0% to 10%
- Doesn’t allow co-signers or co-borrowers
A home equity loan
You can use a home equity loan to pay off an existing personal loan. It’s a second mortgage that leverages the equity in your home to secure a lump sum of money.
Because they use your house as collateral, home equity loans often have lower interest rates and longer repayment terms than personal loans. Keep in mind, however, that you are likely replacing an unsecured loan with one that puts your home at risk of foreclosure if you fail to make payment.
Rocket Mortgage offers fixed-rate home equity loans between $45,000 and $500,000, making it a good option if you have a lot of loans to pay off. It’s known for exceptional customer service and having an easy-to-use digital interface.
Rocket Mortgage Home Equity
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Loan types
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Minimum credit score
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Maximum loan-to-value
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Loan limits
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Repayment period
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Availability
Available in all 50 U.S. states and Washington, D.C.
Pros
- Higher-than-average LTV ratio, meaning you’ll be able to maximize the amount you can take out.
- Above average scores for customer satisfaction from J.D. Power, meaning you’ll be in great hands from application to closing day.
Cons
- High minimum loan amount
- No brick-and-mortar locations
- Only provides two term options: 10 years and 20 years
Debt settlement
If you are having trouble making your loan payments, it may be time to consider a debt settlement company. They work with creditors, including personal loan lenders, to accept less than the full balance owed.
They can only work on unsecured debt, so if your loan is secured with collateral, it won’t be eligible.
Many debt settlement companies require clients to have minimums of $7,500 or $10,000, but Accredited Debt Relief only requires a debt load of $5,000, and it operates in all 50 states.
Accredited Debt Relief
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Minimum debt
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Fees
Settlement fee averages 15% to 25% of enrolled debt, depending on the state.
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Availability
Options and evaluations in all 50 states and Washington, D.C.
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Highlights
Started in 2011, Accredited Debt Relief has helped resolve over $15 billion in debt.
Pros
- Only requires $5,000 in unsecured debt to enroll
- A+ rating from the Better Business Bureau
- Operates nationwide
Cons
- Refers clients to partners for debt consolidation loans
FAQs
What is the difference between refinancing and debt consolidation?
Refinancing replaces one existing loan with a new loan with better terms, such as a lower interest rate or a different repayment length. Debt consolidation combines several debts, such as personal loans or credit card bills, into one monthly payment — often with a new personal loan or balance transfer credit card.
In both cases, the goal is to save money while you pay back your debt.
Can you refinance a personal loan with bad credit?
Refinancing works best when you can get a lower interest rate, which is harder if you have a lower credit score. You may want to work on improving your credit before applying or see if you can find a lender that accepts co-borrowers or secured loans.
Does refinancing hurt my credit score?
Refinancing a personal loan may cause a temporary drop in your credit score because the lender will likely perform a hard credit inquiry. However, making on-time monthly payments on the new loan should improve your score over time.
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