Key insights:
- Refinancing a personal loan replaces your current loan with a new one, which may help you lower your APR, reduce your monthly payment or adjust your repayment term
- To refinance a personal loan, you can apply for a new loan and use the funds to pay off your existing loan
- Refinancing may help you save money, but fees, a hard credit check and a longer repayment term could increase your total loan cost
A personal loan is a convenient way to help pay for a large purchase or consolidate multiple debts into one payment. However, you may find that your payments are higher than you’d like or that a lower interest rate may be available. In that case, you may be able to refinance your personal loan, depending on your financial situation.
Let’s look at the basics behind refinancing a personal loan and whether it’s the right fit for you.
What does refinancing a personal loan mean?
Refinancing is the process of replacing your current loan with a new loan, often with a lower annual percentage rate (APR). If your current loan features a high APR, this may allow you to save on interest. You might also be able to change the repayment term, either lengthening it to lower your monthly payments or shortening it to pay your loan off sooner.
When can I refinance my personal loan?
Generally, you may refinance your personal loan as soon as you start making payments. Be aware that there may be restrictions or fees involved with paying off your old loan early, however.
How to refinance your personal loan
The refinancing process typically follows these steps:
- Review your credit report and score: Before applying to refinance, understand your credit profile. A stronger credit score may make it easier to qualify for a lower APR.
- Compare rates and lenders: Review multiple lenders to understand their rates, fees and repayment terms. Pre-qualification may allow you to see personalized rates without affecting your credit score, though acceptance and approval are not guaranteed.
- Apply for refinancing: When you’ve decided on a lender, you’ll need to apply for your new loan. Be sure to submit all the required personal and financial information to help avoid delays.
- Pay off your current loan: Once approved, you’ll typically receive the funds to pay off your current loan in 1 to 5 business days. Some lenders may even pay off the loan on your behalf.
- Start repaying your new loan: When you’re approved for your refinanced personal loan, your lender will give you instructions on how to make payments. Be sure to make your payments by the due date listed in your terms and conditions.
Should I refinance my personal loan?
Refinancing a personal loan may make sense if the new loan offers significant benefits over your current loan. It’s important to do your research first, however. You don’t want to go through the refinancing process only to discover that it hasn’t helped you the way you intended.
Benefits of refinancing a personal loan
Refinancing a personal loan may be helpful if you want to:
- Save on interest: If your new refinanced loan features a lower APR than your current loan, you may be able to pay less interest over the life of the loan.
- Avoid a variable interest rate: If your current loan features a variable interest rate, meaning the rate can change based on the health of the economy, a refinanced loan may allow you to switch to a fixed interest rate that doesn’t change.
- Change your repayment term: A refinanced loan may allow you to change how long you have to pay back your lender, allowing you to pay off your loan sooner or lower your monthly payments.
Drawbacks of refinancing a personal loan
While refinancing may look like a good solution, be sure to understand the full impact of taking out a new loan before applying. Here are some important things to consider:
- Hard credit check: Refinancing a personal loan means applying for a new loan, which can have a small negative effect on your credit score.
- Extra fees: When refinancing your loan, you may have to pay an origination fee to your new lender in order to receive funding. You might also owe a fee to your old lender for paying your loan off early.
- Added interest: If you decide to increase your repayment term in order to lower your monthly payments, you may actually end up paying more in interest than you would have with your original loan, even with a lower rate.
Understanding your refinancing options
Refinancing a personal loan may give you an opportunity to adjust your monthly payment amount, your repayment timeline or your interest rate. Keep potential fees and the total cost of the loan in mind when applying to ensure the decision makes sense for your situation. If you have questions, speak to a lender to understand how the refinancing process might work for you.
Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
