Refinancing your personal loan could help you save money on costly interest.
If you’re overwhelmed with how much your loan is costing you each month — or you’ve found a tempting deal to lower overall interest or extend repayment terms — refinancing could help you better manage your debt.
But you’ll want to first understand how refinancing works, the costs associated with it and what it’s worth it.
Personal loans through Prosper
You could borrow up to $35,000 for a variety of purposes, with rates from 5.99%–35.99%.
- Recommended Credit Score: 640 or higher
- Minimum Loan Amount: $2,000
- Maximum Loan Amount: $35,000
- Loan Term: 3 or 5 years
- Turnaround Time: 1-3 business days
- Simple online application process
- No prepayment penalties
How does personal loan refinancing work?
Refinancing a personal loan works much like refinancing a mortgage: You apply for a loan to cover the amount remaining on your current loan. Once accepted, you can use the funds from the new loan to pay off the other one.
When refinancing, you’ll still carry the same amount of debt, but you could save money under better terms, a reduced interest rate or lower fees.
Is refinancing the same as debt consolidation?
Not exactly. Although they work the same way, consolidating involves paying off multiple loans at once while refinancing only deals with one loan. You may sometimes see the two used interchangeably though.
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Why should I refinance my personal loan?
People choose to refinance their personal loans for many reasons, but it boils down to either finding a better deal or consolidating debt.
You’ve found a better deal.
- If you think you’ve found a better deal, consider using a personal loan repayment calculator to compare the two loan options and see if the move is worth it. When comparing loans, focus on interest rates but also look at ongoing fees and repayments as well as loan establishment costs. You could get a better idea of the total cost of the loan by evaluating the APR. Consider the features of a loan to make sure it suit your needs — for example, if you’d like the freedom to pay off your loan early, confirm there’s no prepayment penalty.
You want lower payments.
- If you’d like to pay less each month on your personal loan, you could refinance it to extend the repayment period. Simply find a loan with a longer term. Once approved, you can use those funds to pay off your existing personal loan and then enjoy paying less each month on the new one. Keep in mind that lower monthly payments usually means more in total interest over the life of the loan.
How exactly do I refinance my personal loan?
- Compare your options. Take a look at available personal loans above to see if you can get a better deal.
- Consider your refinancing costs. Include origination or other fees for your new loan to ensure that it’s worth your time.
- Apply for your new personal loan. If you meet the eligibility criteria for the new loan, submit your application. You may need to mark your loan purpose as refinancing or consolidating.
- Pay out your current loan with funds from the new one. Lenders will usually transfer the approved funds into your bank account. From there, you’ll need to transfer the funds into the personal loan account you’re looking to pay off in order to close it.
- Make sure your old loan is closed. Confirm with your previous lender that your loan account is closed and you have no balance due.
What are the costs of refinancing a personal loan?
- One-time fees could set you back a few hundred dollars, so confirm if you’ll pay an origination fee or any other fee for getting the new loan.
- Some lenders charge early repayment fees, which can put a considerable dent in the savings you could make from switching. Be sure your current loan doesn’t have that penalty. If it does, make sure the savings on interest are more than that prepayment penalty fee.
Is it worth refinancing?
The value of refinancing depends on your current financial situation and terms of your loan. To determine the value of refinancing, it’s important to consider what your current loans are costing you and then compare that to what the new loan would cost. Remember not to forget any one-time fees the lender may charge for setting up the loan.
You could also evaluate any specific features of the loan that you find important. For example, if you’re refinancing from a fixed rate loan to a variable rate loan, you may save money as long as the variable rate lasts. But these rates are “variable” for a reason: They can go up, leaving you to wonder whether you’d have been better off staying with your first loan. As another example, you may be used to making additional payments to pay your loan back sooner, but the new loan you refinance to may not offer this option — or may charge you for it.
In short, when determining the value of refinancing, take all aspects of both loans into consideration before signing a contract.