When used wisely, a personal loan can be a smart financial move. It can help consolidate debt, pay for medical expenses not covered by your insurance, pay off high-interest credit cards, or cover an unexpected emergency.
When you’re ready to take on a new loan or refinance an existing loan, visit an online marketplace like Credible today.
If you want to reduce your monthly loan payments or take advantage of a lower interest rate, refinancing your current personal loan with a new one at better rates and terms might be the right call.
Can you refinance a personal loan? How to do it
In order to refinance a personal loan — and snag the best rates possible, there are a few simple steps you need to take.
- Boost your credit score and debt-to-income ratio
- Shop for personal loan lenders and compare rates
- Apple for your new loan
- Pay off the original loan
1. Boost credit score/debt-to-income ratio
Refinancing a personal loan will cause a minor dip in your credit score because the lender will do a hard credit check. Your credit may also decline a bit when you close out your old loan. But the dip is only temporary.
Payment history accounts for 35% of your FICO score. So, If your old loan was in good standing at the time of closing, and you make on-time payments on your new loan, you can boost your credit score over time.
Once your credit is in order, then you are clear to start checking out your personal loan options. You can use tools like Credible to plug in your desired loan amount and estimated credit score to compare rates and terms from a variety of reputable lenders. Get started today to see what kind of offers are available to you!
The total amount owed on your credit accounts determines 30% of your FICO score. So when you refinance your existing loan to consolidate your debt, your credit may also improve because you’ll have fewer outstanding balances each month.
Refinancing your existing loan can also lower your debt-to-income ratio (the total amount you owe each month compared to your gross monthly income) because you’ll be reducing your total debt.
2. Shop for personal loan lenders and compare rates
The benefits of comparing lenders and rates far outweigh the time and effort it can take to shop around.
- Compare interest rates. When shopping for a personal loan refinance, it pays to compare interest rates as they can vary widely from one lender to the next. A good credit score will likely get you the best rates and terms and make prequalifying much easier.
- Aim for a better term. Lenders may extend the repayment term on your new loan, which can result in a lower monthly payment (but possibly at a higher interest rate). This is especially true if you have good credit.
- How much can you borrow? Your credit score and credit history play a big part in determining how much you can borrow. Some lenders only offer loans up to $5,000, while others might let you borrow $35,000 or more.
Will you pay fees? Many lenders charge underwriting and origination fees. You may also be charged a prepayment penalty if you pay off your existing loan before the end of your term. These costs are added to your loan amount.
That’s why it's important to look at the annual percentage rate (APR) on the loan when comparing lenders. APR is the actual yearly costs over the term of your loan, including all fees and additional costs.
Are you ready to take on a new loan or refinance an existing loan? Visit an online marketplace like Credible today to compare rates and terms.
3. Apply for your new loan
- You can apply to refinance your personal loan online or in-person. The steps you take are similar.
- Determine how much you can reasonably borrow and pay back (the amount you borrow should be no more than the amount you need)
- Check your credit score
- Choose a lender
- Gather your documents – drivers license, passport, or other state-issued ID, proof of income, bank statements, social security number, and employer information
- Consider prequalifying
- Fill out the application
Your loan may be approved or denied within minutes. Sometimes it can take several days. Once approved, your lender will dispense your funds. To see if you can prequalify for a personal loan, head to Credible.
4. Pay off the original loan
Refinancing means paying off your old loan and taking on a new one for a better rate and terms. Just remember that if you pay off your old loan before the end of the term, you may end up paying a prepayment penalty. However, if the amount you save outweighs the penalty, paying off your old loan early might make sense.
Not sure how much you’ll save by refinancing your personal loan? Check out Credible’s personal loan payment calculator.