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 have found a tempting deal to lower the overall interest or extend repayment terms – refinancing could help you better manage your debt.
But first, you will want to understand how refinancing works, the costs associated with it and if it’s worth it.
What is refinancing?
Refinancing simply means repaying one type of debt with another. So if you refinance a loan, you’ll take out another, typically cheaper, loan to repay the old loan. You then start making repayments towards the new loan. The idea is that if the new loan has a lower interest rate or a shorter term, you’ll pay off your debt faster and save interest.
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 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.
When should I refinance my personal loan?
People choose to refinance their personal loans for many reasons, but it can make sense to do so in any of the following circumstances:
You have found a better deal that you are eligible for
If you think you’ve found a better deal, consider using a personal loan repayment calculator to compare the 2 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 loan’s total cost by evaluating the APR. Consider the loan’s features to make sure it suits your needs – for example, if you’d like the freedom to pay off your loan early, confirm there is no early repayment penalty.
You want lower monthly repayments
If you would 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. However, be aware that a longer term usually means paying more in interest over the loan’s life.
Your credit score has improved
If your credit rating has significantly improved from the time you first applied for your loan, you might now qualify for much better interest rates, so it could be worth refinancing to a cheaper loan.
You want to top up your loan
If you have an existing loan but are interested in borrowing more, you could refinance to borrow the extra funds rather than take out a second, separate loan. To do this, you’ll need to apply for a new loan for the remaining balance and the extra amount you want to borrow. You then pay off your existing loan and start making repayments towards the new, larger loan. Be aware the new loan may have a different interest rate and term from your initial loan, so this might not always be the most cost-effective solution.
You want to take a break from repayments
Some lenders offer loans with repayment holidays for the first 2 months. This means you won’t have to make a repayment for the first 2 months after your loan is approved. If you need a temporary respite from making repayments, one way to do it would be to refinance to a new loan that offers a repayment holiday. However, interest will still build up during this time.
You want to save on interest by paying it back sooner
If you’d like to save on the interest you pay on the loan, you could refinance it to shorten the repayment period. Simply find a loan with a shorter term. Keep in mind that a shorter term will mean higher monthly repayments.
How to renegotiate a personal loan
Like the lender you’re working with? Another way to get better rates and terms is to renegotiate your personal loan with your current lender. Follow these steps:
Check your credit score and report. You can find out your credit score by using any of the free credit reporting agencies available online. Check your credit report for errors to make sure your score is accurate. If you have good credit, you’re more likely to be successful with your negotiation.
Reread the terms and conditions. Before reaching out to your lender, read your terms and conditions one more time to make sure nothing is preventing you from renegotiating your loan. If there is, refinancing might be a better option.
Pre-qualify for the competition. One way to strengthen your argument is to come to your lender with a counteroffer from another lender on a refinancing loan. If your lender thinks it could lose your business, it might make you an even more competitive offer.
Talk to your lender. This could take some time. Typically, the higher up the person you are speaking to is, the more likely you’ll be able to negotiate a change. You can start by calling customer service and asking to speak to the representative’s manager until you’re on the phone with someone who has real power. Make sure you make notes of everything that has been said.
Pros and cons of refinancing a personal loan
Pros
It could save you money. Refinancing to another, cheaper loan could reduce the amount of interest you pay.
Flexible. You can use virtual terminals to take debit and credit card payments over the phone or via email, Internet or fax.
You could repay the loan faster. If you choose a loan with a shorter term, you’ll repay the loan faster and pay less interest overall.
You could reduce your monthly repayments. If you’d prefer to lengthen the loan’s term, you could lower your monthly repayments.
Cons
You could end up paying more interest. Increasing your loan term will lower your monthly repayments but also increase the amount of interest you pay overall.
It will affect your credit rating. You will need to apply for a new loan, which means a hard credit check will be carried out, and this will be recorded on your credit file.
You might have to pay an early repayment fee on your original loan. Some loans come with early repayment penalties if you pay them off early.
Alternatives to refinancing a personal loan
One alternative to refinancing a loan is to use any savings you have to pay off the loan in full. However, it’s important to be sure you still have some funds left to fall back on in an emergency.
Another option is to use a 0% money transfer credit card. However, this is generally best for smaller loan amounts, as you’ll need to be sure the credit limit stretches far enough. You can usually transfer 90% to 95% of your credit limit.
A money transfer card lets you transfer money from your credit card to your bank account and then use the funds however you like – this could include paying off a loan. You’ll then start making monthly repayments to your credit card provider instead, and with a 0% card, these repayments will be interest-free for a number of months. However, you’ll usually need to pay a transfer fee of around 4% of the balance you’re transferring, and you must be sure you can clear your balance before the 0% period ends and interest kicks in.
Bottom line
Refinancing a personal loan has many benefits, but it’s important to weigh up your options carefully before you jump into anything. Consider whether refinancing your loan will help you to pay it off faster and save you money or whether there might be a better alternative elsewhere. If you’re not sure, it’s worth speaking to a debt charity, such as StepChange or Citizens Advice, for fee-free advice.
Finder survey: What aspects of a personal loan matter most to Brits when choosing a one?
Response
Female
Male
Interest rate
35.84%
35.33%
Monthly cost
28.92%
32.61%
Overall cost
25.3%
31.52%
I would not choose a personal loan
23.04%
18.75%
Flexibility on repayments
19.58%
11.96%
Level of early repayment charges
13.86%
14.95%
Whether there's an arrangement fee
10.39%
14.95%
Provider reputation
8.58%
14.67%
Don't know
13.55%
9.78%
Customer service
9.04%
10.87%
Other
0.27%
Source: Finder survey by Censuswide of 1032 Brits, December 2023
Often, lenders do not refinance loans they originated, but some lenders may want to keep you as a customer if you’ve been reliable historically. It never hurts to contact your current loan provider to see if it’s possible.
There is no set limit to the number of times you can refinance a personal loan. But after a point, it won’t be beneficial to refinance because either you’re almost finished paying off the loan or you have a highly competitive rate already.
Interest rates charged on personal loans vary widely depending on your credit profile and financial circumstances.
Yes, when you refinance a loan, you’ll need to make a new loan application. This means a hard credit check will be carried out, which will leave a mark on your credit file. It will also cause your credit score to temporarily dip.
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Chris Lilly is Head of publishing at finder.com. He's a specialist in personal finance, from day-to-day banking to investing to borrowing, and is passionate about helping UK consumers make informed decisions about their money. In his spare time Chris likes forcing his kids to exercise more. See full bio
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