Can You Refinance a Personal Loan?  

Yes, it is possible to refinance a personal loan, but it’s important to understand the reasons for doing so and when it makes sense.

Loan refinance involves getting a new personal loan and using those funds to pay off an old loan. There are potential benefits to personal loan refinancing, such as lower interest rates, better terms, and reduced payments. However, there are risks to consider and certain situations where it works to your advantage, such as when your financial needs change or your credit improves.

In this Tower Loan article, we discuss how to refinance a loan and personal loan refinancing considerations to remember before making a major financial decision.

What Does It Mean to Refinance a Personal Loan?

A personal loan refinance replaces an existing loan with a new one, often at better terms and rates. If you are considering refinancing a personal loan, the benefits must outweigh the risks to make the financial effort worth it.

With a refinance loan, you swap your old loan for a new one but can keep the same lender or choose a different one. Making the switch ensures that you only make monthly payments towards your new loan.

Key Benefits

Benefits of a refinance personal loan include potentially lower interest rates or monthly payments. Personal loan refinancing can also help consolidate your debt or allow you to borrow additional funds to make a major purchase.

How to Refinance a Personal Loan

If you decide that refinancing a personal loan is the right option for your current financial situation, here are the five key steps.

1. Evaluate Your Financial Situation

First, take a hard look at your finances and check your credit score and report for any improvements. If your credit has improved, a refinance personal loan may be worthwhile.

If you have a credit score of 690 or higher, you will typically receive the best loan rates. You can request a free credit report from the three credit bureaus: Equifax, Experian, and TransUnion.

Next, calculate the exact payoff amount for your current loan so you know how much you still owe. Assess the exact amount that you need to still pay because this information will help you choose a lender that offers the best refinancing terms.

Factor in any prepayment penalties or fees that you may incur from your existing lender for ending the loan before the scheduled payoff date. It’s worth calling your current lender or checking their website for a payoff quote and to confirm the outstanding balance and prepayment fees.

2. Shop Around for Lenders

Once you have a good handle on your existing loan situation, it’s time to look for lenders who can accommodate your needs. Plan to compare at least three lenders to determine their rates, fees, and terms.

Some lenders allow you to refinance their own loans, while others only refinance loans from other lenders. The estimated APRs vary from one lender to another. Although it is somewhat rare to be able to refinance with a current lender, it may be possible. That lender may even offer you the best deal because of your established relationship.

The process of how to refinance a personal loan may involve looking for prequalification options with a soft credit check. You can use personal loan calculators and look at online lender reviews to help decide who to go with.

Tower Loan is a preferred lender with competitive rates, an easy application process, and excellent customer service. We have convenient locations near you to help you get the money you need right away and in a responsible way.

3. Check Refinancing Costs

Step three involves gaining a thorough understanding of the costs of a refinance personal loan so that you make a decision that genuinely benefits you.

Ensure that you understand any relevant origination fees, the APR, and how these details affect loan savings. You should also carefully consider the new loan’s terms and the potential impact of extending your repayment period.

4. Apply for a New Loan

If you decide to refinance a loan, you must gather all the required documents, including bank statements and proof of income. You may also need to provide tax documents, paystubs, and your social security number.

Each lender has a different application process, so make sure you understand the steps so that you are prepared and have no surprises. Read all of the fine print in the application so that you fully comprehend your commitment and financial obligations.

Also, remember that submitting a loan application typically requires a hard credit inquiry. This may involve a temporary hit to your credit score, but it may be worth it long-term for better rates and terms.

5. Close and Transition

Once you close on your new refinance personal loan, you’ll use the new loan to pay off the old one. You’ll typically be able to receive your new loan funds within a few days of applying and accepting the new terms.  

Confirm that your original loan is fully paid to avoid any unnecessary additional fees. Then, you can set up payments for your new loan to avoid future missed due dates. Autopay is a great feature to ensure that you are on track for success with your new loan.

When Refinancing Is a Good Idea

Can you refinance a personal loan, and should you? There are many circumstances in which it is a good idea to refinance to improve your financial situation.

One example is if your credit score has improved or if you have reduced your debt-to-income ratio. Refinancing is also beneficial if you are experiencing increased financial strain and need lower monthly payments. The opportunity to pay off a loan faster with shorter repayment terms may also be an attractive reason to refinance a loan.

When You Should Wait to Refinance

However, it may be unwise to refinance a loan if you aren’t able to secure a better rate or terms. In that situation, you may as well keep your existing loan and simplify matters by paying it off as you originally intended.

It’s also not the best idea to refinance a loan if there are high origination fees that negate the savings. If you have a low remaining balance on your current loan, you may be better off just paying the remainder of that loan rather than taking out a new one. It’s also advisable to wait to refinance if you have minimal time left on your current loan’s repayment schedule.

Alternatives to Refinancing

Fortunately, there are many financial options available to borrowers and alternatives to consider before you refinance a personal loan.

One alternative to refinancing is making extra payments to pay off your current loan faster. Another idea is to try negotiating with your current lender for better terms. Depending on your financial situation, it may be beneficial to explore other financial products instead of a new personal loan, such as a home equity loan or balance transfer credit card.

Refinance Personal Loan FAQs

What does it mean to refinance a personal loan, and how does it work? Here are answers to a few common questions that people have about refinancing.

If you have general questions about personal loans, please visit the FAQ section of our website or contact us.

Does Refinancing Hurt Your Credit Score?

Refinancing a loan can impact your credit score. When you refinance, you’ll undergo a credit check, which can slightly and temporarily lower your score. However, this impact is only short-term, especially if you make on-time payments with your new loan.

Yet if you are looking to purchase a new vehicle or rent a new apartment at the same time, this temporary credit score hit could make it more challenging to secure transportation or housing. This is why it’s essential to time your loan refinance strategically to minimize the impact on your life.

How Soon Can You Refinance a Personal Loan?

It is generally best to give yourself a bit of time with your current personal loan to build your credit score before refinancing. There are no official restrictions on the amount of time that must pass before you refinance. However, you’ll have a better opportunity for lower rates with a new loan if your credit score is higher.

Can You Refinance with Your Current Lender?

Yes, you may be able to refinance a personal loan with your current lender or choose a new lender that you’ve never worked with before for a new loan. Not every lender offers refinancing, but it is worth asking yours if that is an option for a streamlined process.

What Are the Requirements to Refinance a Loan?

To refinance a personal loan, you’ll benefit from a history of on-time payments and a good credit score. Lenders will check your credit before approving you for a refinance loan. There is also the possibility of prequalifying for a new loan, which involves only a soft credit check that won’t affect your credit score and can give you a sense of your new repayment rate and interest term.

Although it’s not a requirement, it is advisable to research lenders and shop around for the best deal. You’ll also need to understand all of the associated costs, including origination, application, and processing fees. Ensure that the expenses don’t outweigh the potential savings of a new loan.

Is It Worth Refinancing a Loan?

It is often worth refinancing a personal loan if you qualify for a lower rate. You may qualify for a lower rate if your debt-to-income ratio has lowered or if your credit has improved. If you successfully refinance, you can lower your monthly payments to have more flexibility in your budget or have the opportunity to pay off your debt faster.

Refinancing a Personal Loan with Tower Loan

If you currently have a personal loan through Tower Loan and are interested in refinancing, please contact us to discuss your options.

We make the process quick and straightforward with an online application and helpful financial experts available to answer your questions in person or over the phone. Our branch locations are spread across six states, and we are here to listen to your financial concerns and walk you through the refinance process.