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How to Refinance a Personal Loan

Updated
Dana George
Author: Dana George
Dana George
Dana George
Writer

Dana George has a BA in Management and Organization Development from Spring Arbor University. For more than 25 years, she has written and reported on business and finance, and she's still passionate about her work. Dana and her husband recently moved to Champaign, Illinois, home of the Fighting Illini. And though she finds the color orange unflattering on most people, she thinks they'll enjoy Champaign tremendously.

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Are you stuck with a personal loan that no longer fits your situation? If so, you may want to learn how to refinance a personal loan. To help you prepare, we'll cover what you need to do before you refinance, which documents you should gather, and when refinancing is the best option. Whatever your reasons, here's a rundown of how to refinance a personal loan.

How to refinance a personal loan in 5 steps

A personal loan refinance is when you replace your current loan with a new one, potentially to get a reduced annual percentage rate or a lower monthly payment. Refinancing a personal loan can be broken down into five steps (four if your credit score is up to snuff). Here's how to refinance your loan:

  1. Check your credit score
  2. Improve your credit score, if needed
  3. Shop around for the best loan rates
  4. Apply for a new personal loan
  5. Pay off your current loan

Check your credit score

The first thing you must do is to check your credit score. Your credit score is a three-digit number between 300 and 850. That number represents how well you have managed credit in the past. Fortunately, finding your credit score is easier than ever. Credit card companies, auto lenders, and some other lenders offer a free monthly credit score to their customers as a perk. Look out for your FICO® Score in particular, as this is the credit scoring model that 90% of all lenders use.

When you refinance a personal loan, your credit score should be at least as strong as when you first borrowed the money -- ideally higher. In fact, personal loan refinancing makes the most sense when your credit score and other qualifications are strong enough to snag a lower interest rate.

If your credit score is strong, it's time to refinance a personal loan. If not, your immediate focus should be on the next step.

Improve your credit score

If your credit score is lower than you'd hoped, take steps to raise it before applying for a new loan. Loan refinancing is all about improving your financial situation, which only works if your loan credentials are good enough to inspire a lender to offer a lower interest rate and better loan terms.

Increasing your credit score takes time and patience, but there are some quick ways to boost your score. Check your credit report for errors and get them corrected if you find any. If you're able, it helps to pay down high interest credit card debt. In the long term, make sure you pay all your bills on time, as that will have the biggest impact on your score. A good credit score will help you refinance a personal loan and could save you hundreds of dollars.

For example, by checking Motley Fool Money's favorite lenders today, we see that borrowers with strong credit scores (660 and above) could qualify for interest rates that are below 3%. Interest rates on personal loans for those with credit scores between 580 and 659 begin at around 8%. Personal loans for those with credit scores under 580 are more difficult to find, though not impossible. And if your credit score is below 580 and you manage to find a lender, you're likely to be charged the highest interest rate the lender offers.

Shop around

Most personal loan lenders offer a refinance personal loan product. Your current lender may refinance your existing loan, but you should get quotes from several lenders to get the best deal. Work out how much you'll need to borrow and how much you want to pay each month.

A good lender will offer three things:

  1. A low interest rate. If possible, look for a lower rate than you are currently paying.
  2. A manageable monthly payment. A longer repayment term might help to keep your payments low, but bear in mind that you will pay more in interest overall.
  3. Low fees (or no fees). If possible, avoid loans that charge an origination fee, high closing costs, or a prepayment penalty.

You should also check whether your current loan will charge a prepayment fee, and whether a refinance loan is right for you. For example, if you also have credit card or other consumer debt, you might be better off with a debt consolidation loan.

Many personal loan lenders offer a pre-approval process so they can give you a loan estimate with just a soft credit check. If that's the case, there's no need to worry about it dinging your credit until you commit to a lender. At that point, they'll conduct a hard credit check and finalize the details of your loan.

Compare the best personal loans

Get the best rates and terms to fit your needs. Here are a few loans we'd like to highlight, including our award winners.

Lender APR Range Loan Amount Min. Credit Score Next Steps
Fixed: 8.99%-29.99% APR (with all discounts)
$5,000 - $100,000
680
7.99% - 24.99%
$2,500 - $40,000
660
7.80% - 35.99%
$1,000 - $50,000
300

Apply for a new personal loan

The steps to refinance a personal loan are the same ones you took to get approved for the original loan. Make it easier to refinance a personal loan by gathering the following documents ahead of time:

  • Social Security card
  • Driver's license (or other state-issued ID if you don't have a driver's license)
  • U.S. passport (if you don't have any other photo identification)
  • Current pay stubs
  • Your employer's name, address, and telephone number
  • Your last two tax returns

If you're self-employed, you'll need the following:

  • Bank statements
  • Additional tax returns
  • Other documents that will verify your income

Pay off your current personal loan

Everything you've done to refinance a personal loan has led to this moment. Once the funds have been distributed, you get to pay off the old loan. Be sure to rework your monthly budget in preparation for the new loan payment. And take a moment to enjoy what will hopefully be a lower interest rate and better loan term.

When should I refinance a personal loan?

Here are some of the times it makes sense to refinance a personal loan:

  • You should refinance your loan if your credit score has improved. An improved credit score may give you access to a lower interest rate.
  • You should refinance your loan if interest rates have dropped. If rates have dropped across the board, taking advantage of the new, lower interest rate will save you money.
  • You should refinance your loan if you can't afford your current payment. Presumably, your balance is now lower than it was when you first borrowed the money. Even if you can't snag a lower interest rate, your monthly payment will be lower because you'll borrow less money. You could also consider a refinance loan with a longer repayment period to reduce your monthly costs.
  • You should refinance your loan if your personal loan includes a balloon payment. Balloon payments -- a large lump sum paid at the end of your loan -- are not a common personal loan feature. But if you did take on such a loan and are concerned that you might not be able to make the payment, refinancing may be a smart move.
  • The original debt was jointly held. Let's say you were married or in a serious relationship when you took out a joint personal loan. It may be difficult to split that debt, so instead you may need to refinance in one person's name.

What does refinancing a personal loan mean for my credit score?

Earlier, we talked about soft and hard credit checks. When you rate shop, most lenders will only conduct a soft check, which has no impact on your credit whatsoever. Once you've committed to a loan, the lender conducts a hard credit check to make sure they know everything there is to know about your credit. This hard credit check typically causes a small dip in your credit score. However, your credit score will begin to creep back up when you make on-time payments on your new loan. Don't be so concerned about a temporary dip that you miss out on saving money.

Lenders that refinance loans

Most personal loan lenders allow customers to refinance a personal loan. In fact, they would probably love it if you did, particularly if your original loan was with another lender. Among the lenders we currently recommend are:

Marcus. If you have an excellent credit score, Marcus may be the right personal loan lender for you. They don't mess around by charging pesky fees and offer some of the lowest interest rates around.

LightStream is another great option for those with strong credit scores, particularly if you want to refinance a personal loan from another lender. Like Marcus, LightStream will not charge fees or prepayment penalties. And currently, they offer the lowest personal loan interest rate we've come across.

Avant is a good option for borrowers with less-than-stellar credit. With a credit score of at least 580, Avant will consider you for a $2,000 to $35,000 loan. Avant also stands out for its transparency. You'll know about any fees they charge before signing on the dotted line.

If none of these loans ends up being right for you, there are some other great personal loan options.

Should I refinance my personal loan?

There are several reasons to refinance a personal loan, most of which boil down to saving money or reducing your monthly costs.

If your credit score has risen enough to qualify for a lower interest rate loan, you should definitely consider refinancing. If your payment is too high, you might be able to land a lower payment by refinancing the reduced balance or increasing your loan repayment period.

In short, the decision to refinance a personal loan depends on your specific situation. If doing so can save you money and make your life easier, go for it.

Motley Fool Money's best personal loans

Looking for a personal loan but don’t know where to start? Our favorites offer quick approval and rock-bottom interest rates. Check out our list to find the best loan for you.

Best personal loans

FAQs

  • Yes, you absolutely can refinance a personal loan.

  • When doing so lowers your payment, either through a lower interest rate, a longer repayment term, or by refinancing a reduced balance.

  • When your credit score is too low to qualify for a lower interest rate, or the fees you would pay to refinance will cost more than any savings. If you extend your loan term when you refinance a personal loan, you also need to factor in the increased interest cost.