Can you refinance a personal loan?

A key part of managing any debt effectively is keeping your options open. This gives you the flexibility to adjust your debt payments if your financial situation changes. 

That’s one of the reasons why mortgage refinance loans are so popular — but what if your debt isn’t tied to a mortgage? Can you refinance a personal loan? It’s a good question, since you don’t see as many advertisements around from lenders for personal loan refinances. 

The answer is generally yes — you can refinance a personal loan, if you qualify with a lender. Doing so can have numerous benefits, but there are also some downsides to consider. We’ll explore how refinancing a personal loan works in this article.

Can you refinance a personal loan?

Generally speaking, yes — you are allowed to refinance a personal loan, with a few small caveats. 

First, review the loan agreement for your existing personal loan and check for any prepayment penalties or restrictions on refinancing. They’re not very common, but it’s a good idea to check first because it could impact your decision. If it becomes more expensive than you thought to refinance your loan, it may be better just to pay back the original loan as you first agreed. 

Second, you’ll need to be in a position to qualify with a new lender. You can use many different sources of funds to pay off your existing loan. Some people prefer to use home equity financing products because they frequently offer lower rates, for example, but you could use other options too — even another personal loan, if you wish. 

Pros and cons

Everyone’s situation is unique. Refinancing a personal loan could bring certain benefits or costs for you, depending on your situation. For the average person, though, here are some things to consider when evaluating whether to refinance your loan or not.

Pros of refinancing a personal loan

• Quick funding times: If you opt for another personal loan, it’s a pretty quick process to get funding, as you’re already aware. Most personal loans are funded within a few days. 
• Switch to a new lender: It’s possible to stick with your current lender if you like them. If you’re not happy with your current lender, though, you can take your business elsewhere.
• Borrow additional funds: If you need more funds, taking out a new, larger loan ensures you’ll still have cash left over after paying off your first personal loan. Alternatively, you could borrow more to consolidate other high-interest debt, too. 
• Get a lower interest rate: A common reason to refinance is to avoid higher interest rates, which can save you a lot of money in the long run. If rates have dropped or your credit has since increased, you might be paying more than you need right now.
• Change your loan term length: You can lower your monthly payments by choosing a longer loan term. Alternatively, you can refinance to a shorter term to help save money and get out of debt faster.
• Swap your debt for a different loan type: You can refinance a personal loan with another personal loan, or use another type of debt. People often save a lot of money by consolidating their debt into a home equity loan, for example.

Cons of refinancing a personal loan

• Pay additional fees: Refinancing a personal loan often means paying more fees. You might owe prepayment fees on your current personal loan, for example, and newly originated loans often carry their own fees, too.
• May negatively impact your credit: Applying for new debt means new inquiries will appear on your credit report. Your old personal loan will also appear as “paid off,” and your new debt will show up, too, all of which can shift your credit score in different ways.
• Could take longer to pay off your debt: If you increase your loan term or take out a larger debt while refinancing your personal loan, it’ll extend the time it takes to pay off your debt. 
• Long-term interest costs could increase: You could still end up paying more in interest over the life of the loan, even if you qualify for a lower rate, simply because you’ll be paying off that debt for a longer period of time. 

When and how to refinance a personal loan

Refinancing a personal loan is generally easier than with other types of debts, as long as you can qualify for a new loan. Here’s how you can tell when it’s worth it, and — if it is something you want to pursue — how you can go about refinancing your personal loan. 

When a refinance makes sense

Here are some examples of specific situations where it might make sense to refinance personal loan debt:

• You need more funding: If you take out a larger loan, you’ll still have money left over, even after paying off your existing personal loan. This can be a good way to achieve two goals: get extra funding and change your loan terms.
• Interest rates have gone down: If you took out your personal loan when rates were high and now they’re low, taking advantage of these economic conditions with a new loan can help save you money. 
• Your credit score has improved: Your credit score may have increased over time if you’ve been managing your debt well or if old negative marks have fallen off your credit report. If that’s the case, you might now qualify for better terms on a personal loan.
• Your monthly cash flow has changed: If your income dropped or your expenses increased, refinancing for a longer term can help lower your monthly payment. Similarly, if you have more free cash now, a shorter loan term can help you pay it off quicker.
• You’re not happy with your current lender: Sometimes, people just plain aren’t happy with their lender. It’s a big step, but refinancing can help you move on to greener pastures.

How to refinance a personal loan

Personal loans are often easier to refinance than other types of loans, thanks to the fact that there’s usually no collateral attached to the loan, like real estate or a vehicle. That means you won’t have to worry about clearing up any issues with liens or recording offices. The refinance process will be complete as soon as you pay off your current personal loan. 

Here’s a quick step-by-step approach:

1. Check your current loan balances: You’ll need to know exactly how much to borrow so you can pay off your old loan. If you have other high-interest debts, like credit cards, it’s worth considering paying them off with your new loan, too. 
2. Check your loan refinance options: Decide which type of new debt you’ll use to pay off your old personal loan, whether that’s another personal loan, a home equity loan, an HEI, etc. Then, gather quotes from different lenders to see what your new terms might look like. 
3. Review your budget and long-term financial goals: Check to see how well your new monthly loan payment aligns with your budget. Would it be easier or harder to manage? In addition, how does it impact your long-term financial goals? Would it make those goals easier to reach?
4. Apply for a new loan: Submit a full loan application to your lender of choice. You’ll usually need to submit extra documents, like recent tax returns, pay stubs, bank statements, etc. Staying in touch with your lender can help expedite the process if they require additional information to complete your application. 
5. Pay off your old personal loan: Once you receive the funds for your new loan, simply contact your old lender and pay off the account with a lump-sum payment. Wait until you receive confirmation that your old balance is zeroed out before you stop making monthly payments to your old lender, just to be sure. 

Often, borrowers prefer to stick with the same type of loan when refinancing their debt. If you’d prefer to refinance your loan with another personal loan, here are some of reputable lenders, according to J.D. Power:

• American Express
• Discover
• Citi

Frequently asked questions

Is it a good idea to refinance a personal loan?

It depends on your goals and your financial situation. Refinancing your personal loan can help you borrow additional funds, get a more manageable payment, or secure a lower interest rate. If you’re still working on building your credit, though, you might wait to pay off your existing loans until you’re able to qualify for better terms. 

How long after a personal loan can you refinance?

There aren’t any time limits on when you can refinance your personal loan. After you start making payments on a loan, you can generally refinance it anytime you wish if you can qualify for a new personal loan. Make sure to check if your loan charges a prepayment penalty or has refinancing restrictions first, though. 

Can you add more money to an existing personal loan?

It depends on your lender. Some lenders, like American Express, don’t allow this. Other lenders might, such as Lending Club, but they usually do it by refinancing your existing loan for a larger amount. You’ll get the difference back, similar to taking out a cash-out mortgage refinance. 

What are alternatives to a personal loan refinance?

You can use any type of financing you’re eligible for to refinance your personal loan. Many people use a HELOC to pay off personal loans, especially since HELOCs often offer lower interest rates than unsecured loans. If you prefer to avoid monthly payments altogether, a home equity investment (HEI) could be a flexible option — it gives you a lump sum of cash in exchange for a share of your home’s future appreciation, with no ongoing payments. Some borrowers turn to balance transfer credit cards to wipe out smaller personal loan balances, especially if they can take advantage of a 0% introductory APR offer.

Final thoughts

Sometimes, your current personal loan just isn’t working out. You’re not necessarily stuck with it, though, if you’re able to qualify for a new loan. It’s a good idea to carefully consider all of your options if you decide that refinancing your personal loan is the right decision. 

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