Can You Refinance a Personal Loan? Common Refinancing FAQs
Refinancing a personal loan is possible, but there are some downsides worth considering.
Contributing Writer at Tally
July 28, 2021
More than half of Americans have taken out a personal loan in their lifetime. If you’re one of them, you may have recently seen the Fed Funds Rate drop and noticed its impact on mortgages and other interest rates. Perhaps you've wondered if you can lower your interest rate and asked, "Can you refinance a personal loan?"
We're here to answer that question and some other frequently asked questions about personal loan refinancing. We’ll cover the basics, including what refinancing is and whether you can refinance a personal loan.
Then, we dive into the steps you can take to refinance an existing loan and what alternatives exist if refinancing isn't for you. If your personal financial situation has suffered as a result of debt and you are looking for alternative loan options or better terms, then keep reading.
What is refinancing?
Refinancing is a broad term that refers to lowering your interest rate. You may have heard the term refinancing specifically when discussing:
By securing a lower interest rate from your lender, you ease the burden of repayment. Lowering your interest rate results in lower monthly payments and can potentially save you hundreds, if not thousands, of dollars, depending on your loan terms.
Can you refinance a personal loan?
Refinancing personal loans is possible. There are two ways you can go about doing so:
Refinancing your current loan
The first is to work with your lender to refinance your current loan. For instance, let's say that you currently have a fixed rate of 8%. You can approach your lender and explain that you have been an exemplary borrower with good credit who has never fallen behind on a loan payment.
Your current lender may be willing to lower the interest rate on the loan. Instead of paying 8% in interest, you may end up only paying, say, 5%. The 3% difference means will depend heavily on your repayment terms, including where you are in the life of the loan and the total amount borrowed. But, refinancing can ultimately cut down on your total interest costs.
Opening a new loan
The other refinancing option is to open a new loan. The idea is that the new loan will have a lower interest rate than the original loan.
Say that you have an outstanding balance of $8,000 on a loan and your interest rate is 12%. You compare the best personal loan offers and find a lender willing to grant you an $8,000 loan at 6%. You take out a new loan, use the principal to pay the balance of the old loan, and then pay off the new loan’s balance at a lower interest rate. Essentially, you're saving 6% on the loan.
But there are a few issues to be aware of. For one, your new lender will need to perform a hard credit inquiry to process your loan application. Your credit score will dip briefly due to this inquiry, though making consistent on-time payments can help you rebuild your credit.
Second, there are some fees associated with opening a new personal loan. These can include origination fees, balance transfer fees and additional fees that can vary from lender to lender. The old loan may also have prepayment penalties that make it difficult for you to pay down the balance, so you'll need to look into that as well.
Lastly, you may not necessarily qualify for a new loan or a loan with a better rate. Your credit history will dictate this. The best rates are reserved for those with excellent credit scores on the FICO scale. If you have bad credit, you may need to look at alternatives or build your credit first.
What are the steps to refinance a personal loan?
If you've decided to explore refinancing a personal loan, then consider these steps:
1. Knowing your credit score
The first step in refinancing a personal loan is to figure out your credit score. You can check your credit score online or potentially through your credit card company if it's offered as a perk.
Each lender decides what credit score they require for a personal loan refinance. Being accepted with a lower credit score may come with stipulations, though, such as shorter terms or a lower loan amount. Ultimately, your lender will have the final say as to whether you’re eligible.
2. Finding a loan
Once you know your credit score, you'll have a better idea of whether you’re eligible and what you can expect when looking for a loan. Be sure to speak with different financial institutions to find the best rate. You should be primarily concerned with the:
Estimated monthly payment amount
Lenders can pre-qualify you, which may help you figure out what to expect when you take out the loan. They will look at your credit report and personal finances before providing an offer. Prequalification does not require a hard inquiry, so it won't harm your credit. However, if you choose to accept the lender’s offer, they will still need to run a hard inquiry on your credit even though you're pre-qualified.
Remember that you should be looking to reduce how much you pay in interest. If an offer is not better than your current personal loan, then it may not be worth refinancing.
Also, be sure to include your current lender in discussions. It's possible to negotiate your current rate. Doing so could prevent you from paying origination fees from opening a new loan.
3. Paying off your loans
Once you find a loan you like, you can apply through the lender. Assuming you're approved, you will receive your new funds in a couple of business days. Use these funds to pay down your old loan immediately.
Some lenders may do this for you directly. Others will deposit funds in your bank account, and you are responsible for using them to pay off the other loan. Be sure to pay any prepayment penalties associated with the old loan so that you can close the account.
4. Making payments on your new loan
Lastly, begin making payments on your new loan. You may want to consider signing up for autopay so that you don't miss a due date. Missing a payment could result in late fees. Additionally, making on-time payments will help build your credit score.
Are there alternatives to refinancing a personal loan?
Yes, there are a couple of alternatives to refinancing a personal loan, especially if you’re using the loan as a form of debt consolidation.
One of the alternatives to a personal loan is a balance transfer card. A balance transfer card allows you to combine multiple outstanding credit card balances onto a single credit card with a low interest rate.
Another way to refinance debt is Tally. Tally is an automated credit card payoff app that allows you to pay down debt quickly. The app extends qualifying users a low-interest line of credit1, which can be used to pay outstanding credit card balances.
Securing the lowest rate when paying off debt is beneficial
If you already have a personal loan, there is good news. With a decent credit score, you can possibly refinance it to secure a lower interest rate. And, the bottom line is, if you have the opportunity to refinance and save money, you should consider it.
However, refinancing a personal loan may not be right for your financial situation. Perhaps you have a lot of credit card debt you need to tackle first. One alternative to consider is Tally.
Tally automatically pays down your credit card debts in the most efficient way possible. You don't have to worry about missing due dates. And, you'll quickly free up cash that you can put toward other financial goals.
1To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) Will be between 7.90% - 29.99% per year, and will be based on your credit history. The APR will vary with the market based on the Prime Rate.