Refinancing a personal loan has become increasingly popular as interest rates fluctuate and lenders expand their product offerings. If you’ve been wondering, “Can you refinance a personal loan?” the short answer is: yes, absolutely. Many borrowers refinance to get a lower rate, reduce their monthly payment, consolidate debt, or pay off their loan sooner.
But personal-loan refinancing isn’t always the right move, and timing matters. This guide breaks down how refinancing works, the benefits and risks, who qualifies, and what to expect—along with two real-world case studies to show how borrowers saved money (and when refinancing didn’t make sense).
What Is Personal Loan Refinancing?
Personal loan refinancing means replacing your current personal loan with a brand-new one—usually from a different lender, though some lenders allow internal refinancing. The new personal loan pays off the old one entirely. You then make payments on the new loan, ideally with:
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A lower interest rate
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A longer term (lower payment)
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Or a shorter term (less interest paid overall)
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Potentially better loan features such as no fees or more flexible payment options
In many ways, it mirrors refinancing a mortgage or auto loan—but with simpler approval requirements and no collateral.
Why Do People Refinance a Personal Loan?
Borrowers typically refinance for one or more of these reasons:
1. Lowering the Interest Rate
If your credit score has improved since you took out the loan, you may qualify for substantially better rates. Moving from 25% to 12% APR can make a huge difference in total interest paid.
2. Reducing Monthly Payments
Extending the loan term lowers the monthly payment, which can free up cash flow. This is popular during financial hardship.
3. Paying Off the Loan Faster
A shorter term or lower interest rate helps eliminate the loan sooner.
4. Switching From Variable to Fixed Rates
While rare in personal loans, some lenders offer variable-rate personal loans. Refinancing into a fixed rate provides stability.
5. Consolidating Multiple Debts
Some borrowers use a refinance to roll multiple personal loans—plus credit cards—into one new loan.
6. Removing a Co-Signer
Life changes, and refinancing can remove a co-signer from responsibility.
When Does Refinancing a Loan Make Sense?
Refinancing is typically beneficial when:
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Your credit score has improved by 50–100+ points
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Your DTI (debt-to-income) ratio is lower
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You have a stable job with steady income
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Rates have dropped since your original loan
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Your current lender charges no prepayment penalty
Borrowers moving from subprime (580–640) to near-prime (660–700) often see the biggest benefits.
When You Shouldn’t Refinance a Personal Loan
Even though refinancing is widely available, it’s not always smart. Avoid refinancing when:
1. The New Loan Has a Higher APR
Some “debt consolidation” loans advertise lower payments but longer terms, causing you to pay more in the long run.
2. You Have a Prepayment Penalty
A few smaller lenders still charge penalties for paying off your loan early. That fee could wipe out the savings.
3. You’re Near the End of Your Loan Term
Interest on personal loans is front-loaded. If you’re in the final third of the loan, refinancing often costs more because you restart the amortization schedule.
4. You Need Your Credit Score for a Big Purchase Soon
Applying for new credit temporarily lowers your score by a few points. If you’re about to apply for a mortgage or auto loan, timing matters.
How to Refinance a Personal Loan (Step-by-Step)
1. Review Your Current Loan
Check:
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Remaining balance
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APR
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Monthly payment
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Remaining term
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Prepayment penalty (if any)
2. Check Your Credit Score
Most lenders require:
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580–620 minimum scores
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660+ for the best refinance rates
3. Shop Personal Loan Lenders
Use online marketplaces or direct lender pre-qualification tools. Pre-qualification won’t hurt your credit.
4. Compare True Loan Costs
Look at:
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APR
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Origination fees
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Term length
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Total interest paid over the life of the loan
5. Apply for a New Personal Loan
Approval usually takes 5–48 hours. Provide:
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Current loan statements
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Recent pay stubs
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Bank account verification
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Government ID
6. Pay Off the Old Loan
Your new lender may send the payoff amount directly, or you may receive the funds and pay it off yourself.
7. Confirm Your Old Loan Is Closed
Request a payoff letter or account closure confirmation.
How Refinancing Affects Your Credit
Refinancing impacts your credit in several ways:
Temporary Score Drop
A hard inquiry can lower your score by 3–8 points temporarily.
Long-Term Score Increase
Refinancing can help your score if:
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Your payment lowers (reducing default risk)
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Your credit utilization improves (if revolving debt is consolidated)
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You make on-time payments consistently
Closed Account Impact
Closing the old loan won’t usually hurt your score unless it was your only installment loan.
⭐ Case Study #1: Lowering the Interest Rate to Save Thousands
Borrower: Maria, 34
Original Loan: $20,000 personal loan at 24.99% APR, 60-month term
Monthly Payment: $596
Reason for High Rate: Previous medical debt had lowered her credit score to 605
What Changed?
After two years of on-time payments and improved credit habits, Maria raised her credit score to 690. She received pre-qualified offers from several lenders.
Refinanced Loan:
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Balance Remaining: $13,500
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New APR: 11.99%
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New Term: 48 months
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New Monthly Payment: $353
Savings Breakdown
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Maria saves $3,400+ in interest over the remainder of the loan.
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Her payment dropped by $243 per month, freeing up cash for emergency savings.
Why Refinancing Made Sense
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Her rate dropped significantly
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No prepayment penalty
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She was still early enough in the amortization schedule to save money
This is an example of personal-loan refinancing working exactly as intended: lowering cost, payment, and stress.
⭐ Case Study #2: When Refinancing Did Not Make Financial Sense
Borrower: Jamal, 42
Original Loan: $12,000 at 14.5% APR, 36 months
Remaining Term: Only 8 months left
Remaining Balance: $3,400
Why He Considered Refinancing
Jamal received an offer for a new loan at 10.5% APR with a lower monthly payment. On the surface, it looked like an opportunity to save.
The Problem:
The new loan came with:
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A 3% origination fee
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A new 24-month term
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Restarted interest amortization
The lower payment ($168 vs. $255) looked appealing, but total interest and fees would have cost him $600 more over the long run.
Why Refinancing Was a Bad Fit
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He was near the end of his original loan
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He would restart the amortization schedule
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Fees outweighed savings
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The lower payment would extend his debt for an additional 16 months
Jamal ultimately paid off his loan early and saved money.
This case underscores the importance of analyzing total cost rather than focusing only on monthly payment.
Key Tips for Refinancing a Personal Loan Smartly
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Compare total interest, not just monthly payments
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Look for no-fee refinance offers
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Try to keep your term roughly the same length
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Avoid refinancing late in the loan cycle
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Pre-qualify with multiple lenders to compare APRs
Final Thoughts: Should You Refinance Your Personal Loan?
Yes—refinancing a personal loan can be a smart financial move, especially if your credit score has improved or interest rates have dropped. Many borrowers save thousands by switching to a lower-rate loan or restructuring their monthly payments.
But refinancing isn’t universally beneficial. If you’re late in the loan term or the new loan introduces high fees, it may cost more long-term.
The best approach is to compare offers carefully, calculate total interest costs, and choose a refinancing path that matches your financial goals.
