Yes, you can refinance a personal loan, but whether it saves you money depends on your credit score, current interest rates, and how much time is left on your original loan
Refinancing a personal loan means taking out a new loan to pay off the old one. The new lender pays your original lender in full, and you start making payments on the new loan instead. This works the same way as refinancing a mortgage or car loan — you're replacing one debt with another.
The main reason people refinance is to lower their interest rate. If your credit score has improved since you took out the original loan, or if market interest rates have dropped, a new lender might offer you better terms. A lower rate means lower monthly payments, less interest paid over the life of the loan, or both.
Refinancing also lets you change the loan term — you could stretch payments over more months to lower what you pay each month, or shorten the term to pay off the debt faster. Some people refinance to consolidate multiple debts into one payment, though that's technically a different product called a debt consolidation loan.
Key Takeaways
- Refinancing only makes financial sense if your new interest rate is lower than your current rate, or if you're extending the term to free up monthly cash flow.
- Most lenders charge an origination fee (typically 1 to 6 percent of the loan amount) when you refinance, so you need to calculate whether the interest savings outweigh that upfront cost.
- Your credit score is the biggest factor in whether you'll get approved and what rate you'll receive — lenders typically require a score of 600 or higher, though better rates start around 700.
- Refinancing resets the clock on your loan, so if you're near the end of your original term, you could end up paying interest for years longer even with a lower rate.
- The refinancing process takes one to two weeks from application to funding, and you'll need to provide income verification and recent bank statements just like you did for the original loan.
When refinancing actually saves you money
The math on refinancing is straightforward but requires you to do the calculation yourself — lenders won't volunteer this information. You need to know three numbers: your current interest rate, the rate the new lender is offering, and the origination fee they'll charge.
Let's say you have a $10,000 personal loan at 12 percent interest with three years left to pay. A new lender offers you 8 percent with a 3 percent origination fee ($300). That fee gets added to your new loan balance. You'd pay more interest overall if you're stretching the loan longer, but if you keep the same three-year term, you'd save roughly $800 in interest charges — meaning the refinance nets you about $500 in savings after the fee.
The break-even point is the month when your interest savings equal the origination fee. If you plan to pay off the loan before reaching that point, refinancing costs you money. If you have a lot of time left on the original loan, the savings grow larger.
How your credit score affects refinancing
Your credit score determines whether you'll be approved and what interest rate you'll receive. Most personal loan lenders require a minimum score of 600, but rates improve significantly as your score climbs. At 600 to 650, you might get approved but at a rate only slightly better than what you already have. At 700 and above, you'll see meaningful rate reductions.
If your score has dropped since you took out the original loan, refinancing may not be worth pursuing — you could end up with a higher rate than you currently have. Check your credit report for free at annualcreditreport.com before you apply anywhere. Applying for a new loan triggers a hard inquiry that temporarily lowers your score by a few points, so only apply if you're serious about refinancing.
The origination fee and other costs to watch for
Most personal loan lenders charge an origination fee between 1 and 6 percent of the loan amount. This fee is deducted from the loan proceeds or added to your balance — either way, you pay it. Some lenders advertise "no origination fee," but they typically compensate by charging a higher interest rate or including other fees.
Beyond origination fees, watch for prepayment penalties on your original loan. Some lenders charge a fee if you pay off the loan early. Check your original loan agreement or call your current lender to ask. If there's a prepayment penalty, add that cost into your refinancing calculation — it might eliminate your savings.
A few lenders charge application fees or late fees that are higher than average, so compare the full cost picture across at least three lenders before deciding.
How refinancing changes your loan term
When you refinance, you choose a new term — typically 24 to 84 months. This is where many people make a costly mistake: they refinance to a longer term to lower their monthly payment, not realizing they're paying interest for years longer.
If you have 18 months left on your original loan and you refinance to a new 60-month term, you're adding 42 months of interest payments. Even with a lower rate, you could pay more total interest than you would have by sticking with the original loan. The monthly payment feels better, but the total cost is worse.
The smartest approach is to refinance to the same term you have left, or shorter. If you have 18 months left, refinance to 18 months or less. This locks in the rate savings without extending your debt.
The refinancing application and approval process
Applying for a refinance loan is similar to applying for the original loan. You'll provide your Social Security number, income information, employment history, and recent bank statements. The lender will pull your credit report and verify your income — usually by requesting recent pay stubs or tax returns.
Approval typically takes three to five business days. Once approved, you'll sign loan documents and the lender will send the funds directly to your current lender to pay off the balance. You'll then make payments to the new lender. The entire process from application to funding usually takes one to two weeks.
During this time, keep making payments on your original loan as scheduled. Don't stop paying just because you've applied to refinance — if the application is denied, you don't want to be late on your current loan.
Alternatives to refinancing a personal loan
If refinancing doesn't make sense for your situation, you have other options. If you're struggling with monthly payments, you could contact your current lender and ask about a loan modification — some lenders will extend your term or adjust your rate without requiring a new application. This is less common with personal loans than with mortgages, but it's worth asking.
If you have multiple personal loans or credit card balances, a debt consolidation loan might be better than refinancing a single loan. A consolidation loan pays off all your debts at once, leaving you with one payment. This is technically a new personal loan, but it's structured specifically for combining multiple debts.
If your credit score is too low to refinance at a better rate, focus on paying down the balance aggressively or waiting six to twelve months while you improve your credit before refinancing.
Frequently Asked Questions
Can I refinance a personal loan if I'm behind on payments?
Most lenders won't refinance if you're currently late or have recent late payments on your credit report. You'll need to bring your account current first, then wait at least a few months before applying. Some lenders may consider you if you're only one or two payments behind, but you'll face higher rates or denial.
What if I still owe more than the loan is worth?
Personal loans are unsecured, so there's no "loan value" the way there is with a car or house. You owe what you owe. If you want to refinance, the new lender will simply pay off your current balance, and you'll owe that same amount to them under the new terms.
Does refinancing hurt my credit score?
Yes, temporarily. The hard inquiry from the new lender drops your score by a few points, usually recovering within a few months. Closing the original loan account can also have a small impact. Over time, refinancing to a lower rate and paying on time will improve your score, but expect a short-term dip.
Can I refinance multiple times?
Technically yes, but each refinance costs you an origination fee and triggers a hard inquiry. Refinancing more than once every 12 to 18 months rarely makes financial sense unless interest rates have dropped significantly or your credit score has improved dramatically.
What happens to my original loan when I refinance?
The new lender pays it off completely. Your original lender closes the account, and you have no further obligation to them. You'll receive a payoff confirmation letter showing the account is settled. Make sure you receive this documentation for your records.