Refinancing a personal loan can be a powerful way to save money, lower your monthly payments, or pay off debt faster. By replacing your existing loan with one that offers better terms, you may be able to reduce interest costs or improve your cash flow. However, refinancing isn’t always the right move—understanding when it makes financial sense is key to maximizing your savings.
Key Points:
- Refinancing replaces your current loan with a new one, potentially lowering your interest rate, monthly payments, or loan term.
- It makes the most sense if your credit score or income has improved, helping you qualify for better terms.
- While refinancing can save money, fees, penalties, and extended terms may reduce or eliminate those savings.
- Always compare offers and calculate total costs to ensure refinancing aligns with your financial goals.
What Does It Mean To Refinance Your Personal Loan?
Refinancing a personal loan means taking out a new loan to repay an existing one. Once your existing personal loan account has been repaid and closed, you’ll start making loan payments towards your new loan, with a new interest rate and loan terms.
When refinancing, you can choose to apply with the same lender or a different one.
When Should You Refinance?
Refinancing can mean tons of money saved in interest, more affordable monthly payments, or being debt-free more quickly. But it doesn’t always make financial sense. Consider refinancing your personal loan if one or more of the following applies to you:
You Have Better Credit
One of the biggest reasons why consumers refinance their loans is to get a lower interest rate. Doing so can both reduce monthly payments and cut down on overall interest charges over the loan term.
If your credit score has improved since you originally took out your personal loan, you may be able to qualify for a lower rate by refinancing your personal loan.
| How Your Credit Score Affects Refinancing Rates Your credit score plays a major role in determining the interest rate you’ll qualify for when refinancing. 600–659: Typically results in higher interest rates and fewer lender options. 660–699: Good credit range with moderate rates depending on other factors. 700+: Strong credit profile with access to lower rates and better terms If your credit score has improved since you took out your original loan, refinancing may help you secure a more competitive rate. |
Your Income Has Increased
If you’re earning more money these days, you may have more cash available to make bigger loan payments. If so, refinancing to shorten the loan term can help you pay off your debt a lot earlier. Not only will you be left with one less bill to pay, but you can also slash the amount paid in interest by making higher loan payments, making the loan less expensive overall.
You Want To Lower Your Payments
If your current finances are making it difficult to comfortably cover your monthly loan payments, you may want to refinance to lower your payments. You might be able to refinance your loan to extend the loan term.
Longer loan terms mean lower monthly payments, which can ease a bit of financial pressure off your wallet. Moreover, you’ll have a lot more time to repay what you owe.
Borrow Up To $50,000
How To Know If Refinancing Is Worth It
Before refinancing, it’s important to determine whether the potential savings outweigh the costs. Use this simple formula:
| Total savings – fees = net benefit |
If your net benefit is positive, refinancing may be worthwhile. Ask yourself:
- Will you qualify for a lower interest rate?
- Will you pay less total interest over the life of the loan?
- How long will it take to break even after paying fees?
If you can confidently answer “yes” to these questions, refinancing is more likely to make financial sense.
| Real Savings Example Seeing the numbers can help put refinancing into perspective. Example: Refinancing a $20,000 loan from 12% to 8% could save you thousands of dollars in interest over the loan term while also reducing your monthly payment. Even a small rate reduction can lead to meaningful long-term savings, especially on larger loan balances. |
How To Refinance Your Loan
If you want to refinance your personal loan, follow the steps below:
Step 1. Gather And Compare Options
Avoid taking the first offer you get, especially if your credit score is better than when you originally applied for the loan, to ensure that you get the best personal loan.
Comparing multiple loan refinancing offers will help you identify which loan best meets your needs and offers the best savings. It’s also one of the most effective ways to secure a lower rate.
When comparing your options, make sure to consider loan rates, loan terms, and applicable fees.
Step 2. Negotiation Tips
Lenders usually don’t give their best offer upfront. Once you’ve narrowed down your options, take the opportunity to negotiate with lenders to get an even better deal than what you were initially offered.
Determine what you want from the lender, such as a lower interest rate, and offer something in return. Below are things you can offer the lender as a negotiation tactic.
- Use an offer from another lender to gain a competitive offer
- Provide collateral
- Show how your finances have improved
Step 3. Determine The Personal Loan Refinancing Costs
There will likely be applicable fees related to your refinance, such as origination fees or early repayment fees. Read the fine print of your existing loan to determine what it will be. Once you have a final figure, determine if the cost is worth the savings you’d get from refinancing.
It is possible to increase the amount of money you want to borrow for refinancing in order to cover these fees. Although, you should still ensure that the cost is worth your while so you aren’t taking on more debt for no reason.
Step 4. Apply For The New Loan
If the cost of refinancing is worthwhile, it’s time to actually apply. Before submitting your application, be sure to check the eligibility criteria for the new loan.
To apply you’ll generally need to provide information and supporting documents regarding your identity, income, and employment.
Step 5. Pay The Old Loan Off With The New Money
Once you get approved for the new loan, use the new money to pay off your existing loan. Generally, lenders will transfer the new money directly into your bank account, it is your responsibility to transfer the funds to the existing loan to close it.
Step 6. Verify Old Loan Is Closed
After the funds have been transferred to your old loan account, contact your old lender to ensure that it has been closed and the balance is zero. Once this has been done, you will have officially refinanced your loan.
Learn more: How To Get Approved For A Personal Loan: Personal Loan Requirements
Advantages Of Refinancing Personal Loans
Refinancing comes with some significant benefits, including the potential to save money or make your payments more affordable. Here are a few key perks to refinancing a personal loan:
- Lower Interest Rate. If your credit score has increased since you took out your loan, you may be able to qualify for a lower interest rate on a refinance. This can help you save thousands of dollars over the life of the loan.
- Pay The Loan Off Faster. If your goal is to pay off your loan as soon as possible, you can shorten the loan term with a refinance. While your monthly payments may be higher, you can be debt-free sooner and save a ton in interest payments.
- Extended Loan Terms. If you want to reduce your monthly payments, you can refinance your personal loan with a longer term. This will give you more time to repay the balance, which means lower monthly payments.
- Payment Stability. If you currently have a variable-rate loan, you can refinance to a fixed-rate loan for more payment stability and predictability.
Disadvantages Of Refinancing Personal Loans
Along with the benefits of refinancing a personal loan comes a few drawbacks. Be sure to consider these before applying:
- Additional Fees. When you apply for a new loan, the lender may charge added fees such as loan origination fees. You’ll need to crunch the numbers and account for these extra fees to make sure refinancing your personal loan makes financial sense.
- Early Prepayment Penalties. Some lenders charge a fee for early loan repayment. Find out if you’ll be charged this penalty fee for paying off your existing loan early, and if so, find out what the exact charge will be. Again, you’ll want to do some calculations to verify whether or not all these additional fees will cut into any potential savings from a refinance.
- More Paid In Interest. If you refinance to extend the loan term, you could be paying more in interest overall.
- Impact On Your Credit Score. Since refinancing involves taking out a new loan, the lender will conduct a “hard” credit check, which may have an impact on your credit score. Moreover, opening and closing new accounts can affect your credit history length which can also impact your score.
Is Refinancing Expensive?
It can be costly to refinance a personal loan, but it depends on the specifics of the loan you have and want to apply for. There are often fees associated with cancelling and opening a new loan, which could cost you hundreds of dollars.
To determine how much it’ll cost you, you need to read all of the documents of the existing loan and new loan to figure out how much you should expect to pay.
| Estimate Your Refinancing Costs Use a loan calculator to estimate how much refinancing could cost—or save—you based on your situation. Key inputs to consider: – Loan amount – Credit score – Loan term By adjusting these variables, you can better understand your potential monthly payment, total interest costs, and overall savings before making a decision. |
Reasons You Shouldn’t Refinance Your Personal Loan
In some situations, a refinance might not be the right option. Here are some scenarios in which you shouldn’t refinance your personal loan:
Your Loan Is Almost Fully Repaid
If you’ve paid off most of your personal loan, refinancing won’t make much sense. You’ll be paying more in fees and possible early repayment penalties, which could offset any savings you might benefit from. Instead, focus on paying off whatever balance you have left.
You Can’t Get A Lower Interest Rate
Getting a lower rate is one of the most common reasons to refinance. If rates are really high right now or your credit hasn’t improved enough to help you secure a lower interest rate, refinancing might not be a good idea.
| When Refinancing Can Backfire While refinancing can offer benefits, it’s not always the right move. – Repeated refinancing can extend your debt timeline, keeping you in debt longer. – Lower monthly payments can create a false sense of affordability, leading to less urgency in repayment. – There’s a risk of re-accumulating debt, especially if spending habits don’t change. Carefully evaluate your long-term financial goals before refinancing to avoid these potential pitfalls. |
Alternatives To Consider
If you want to reduce your interest rate, refinancing may be a good option. But there is another alternative to refinancing that may afford you with a lower interest rate: a credit card balance transfer.
Personal Loan Refinance Or Credit Card Balance Transfer? An Overview
| Option | Best For | Risk |
| Refinance | Lower interest rate or new terms | Fees and potential penalties |
| Balance Transfer | Short-term interest relief | Promotional rate expiry |
While credit card balance transfers are usually designed for transferring credit card debt, some lenders allow you to transfer other high-interest debts, like personal loans¹.
If your personal loan is eligible and you can access a 0% or low-interest introductory offer, a balance transfer could help you save a significant amount on interest.
Keep in mind: most balance transfers come with a 3–5% fee, and you must pay off the balance before the promotional period ends to avoid interest charges.
| Important: Balance transfer promotions generally do not apply to cash advances. While it’s possible to use a credit card cash advance to pay off a personal loan, this option is usually more expensive and should only be considered if the cash advance rate is lower than your current loan rate and your credit limit allows it. |
Does Refinancing Make Sense For You?
Refinancing can be a great option for some, but a waste of effort for others, it depends entirely on the individual’s unique financial position. Before jumping into a refinancing deal, make sure that you consider your specific financial goals and situation. If you need assistance with refinancing, Loans Canada can help you today.
FAQs
Can refinancing my personal loan affect my credit score?
Can you refinance a personal loan with the same lender?
Can you renegotiate the rate and terms of a personal loan?
Are rates on unsecured loans higher?
References:
1Captial One. All About Balance Transfers. CaptialOne.ca
