How to refinance a personal loan

Personal loans are a useful tool for paying off or consolidating higher-interest debt. But what if personal loan rates have come down significantly since you borrowed initially?

Fortunately, refinancing your personal loan could be an option. This step might earn you a lower rate, a term that works better for your situation, or even a reduction in your monthly payments.

Here’s what to know about personal loan refinancing, when it might make sense, and when to skip it.

Refinancing involves replacing an existing personal loan with a new one, either from your current lender or a different one. Whether it makes sense to refinance depends on several factors, including your credit, past and current interest rates, and income and expenses.

Many borrowers decide to refinance their personal loans to access a lower interest rate or reduce their monthly payments. And if you refinance at a good time, you could end up scoring a lower interest rate and lower monthly payments.

That said, be mindful of potential fees, as some personal loan lenders charge origination fees and prepayment penalties. Origination fees are typically a percentage-based, upfront fee that comes out of your loan proceeds when you borrow. Prepayment penalties are typically structured as the cost of a few months of loan interest if you repay your loan early.

If you’re thinking about personal loan refinancing, it could make sense in the following cases:

• You have better credit: If your credit is stronger now than it was when you borrowed initially, refinancing your personal loan could make sense. Stronger credit often means lower interest rates.

• Your financial situation has improved: Refinancing may also be a smart move if your income is higher or your debt is lower than when you took out your existing loan. A stronger financial situation is likely to earn you a lower rate.

• Current interest rates are lower: Maybe you borrowed when interest rates were high across the market. If that’s the case, refinancing in a lower-rate environment could reduce your interest costs. When the Federal Reserve cuts its rate, for example, personal loan rates may decrease too.

• You want a new lender or repayment term: If you’re unhappy with your original lender, refinancing with a new company could improve your situation. Likewise, a refinance may also let you change your repayment term, allowing you to repay your loan sooner.

While refinancing can be a smart move in the situations mentioned above, it’s probably best to delay it in these cases:

• Your loan is almost paid off: Refinancing may not make sense if you’ve almost fully repaid your loan. If you have less than a year of repayment left, for example, refinancing may not save you much money. In addition, you may pay fees to refinance, which are harder to recoup if you don’t have much time left in repayment.

• You can’t get a lower interest rate: Refinancing also probably doesn’t make sense if rates are higher than when you originally applied for your loan, as you’ll end up with higher interest costs.

• Your financial situation has declined: If you have more debt, or your income or credit has declined since you borrowed your original loan, refinancing probably isn’t a wise move. Your interest rate on a new loan is unlikely to be lower if your finances have significantly worsened.

Borrower requirements for a personal loan refinance vary depending on the lender you choose, but generally, you’ll need fair credit, consistent income, and ideally, a debt-to-income level of 36% or less.

One important thing to note: The higher your credit score, the more likely you are to get a low interest rate. Better credit can also translate into lower origination fees (or waived fees entirely).

Read more: How to apply for a personal loan

Because borrower requirements, interest rates, and loan options vary by lender, shopping around is key. Consider prequalifying for a personal loan with a few different lenders, including local banks and credit unions, and online lenders, to get insight into the average offers you could be approved for.

To prequalify, you share some basic personal and financial information with potential lenders. In exchange, those lenders provide a loan estimate, detailing a potential term, interest rate, fees, and loan amount. Prequalifying won’t impact your credit.

If you’re not sure where to look for a loan, these online lenders could be a good place to start.

Read more: What’s the best place to get a personal loan?

If you refinance your personal loan at the right time, it could mean a lower rate, a better term, or lower monthly payments. But refinancing doesn’t make sense in every case. Before moving forward, look at your current financial situation, review your credit, and consider the current interest rate environment. Then, start comparison shopping and prequalifying if you find that refinancing is a wise move.

This article was edited by Alicia Hahn.