How to Refinance a Personal Loan: When It Makes Sense

Key Takeaways

Refinancing replaces your existing personal loan with a new one — ideally at a lower rate or better terms.
The best time to refinance is after your credit score has improved significantly since you took out the original loan.
Watch for origination fees on the new loan — they can offset interest savings if not accounted for.
Extending your loan term to lower monthly payments also increases total interest paid.
Pre-qualify with multiple lenders using soft inquiries before submitting a formal application.

When you took out a personal loan, you locked in an interest rate based on your credit profile at that moment. If your credit score has improved, interest rates in the market have fallen, or your financial situation has changed significantly, you may be able to get a better deal by refinancing — replacing your existing loan with a new one that has lower rates or more favorable terms.

Refinancing is not always the right move, and the math is not always in your favor. Here is how to evaluate whether it makes sense for your situation.

Need a personal loan? Get up to $5,000

Fast online application · All credit types welcome · Decision in minutes

Check My Options →

What Does Refinancing a Personal Loan Mean?

When you refinance a personal loan, you take out a new loan — from either your existing lender or a different one — and use those funds to pay off your current loan balance. From that point, you make payments on the new loan under its new terms.

Unlike mortgage refinancing, personal loan refinancing does not involve fees like appraisals or title insurance. The main cost to evaluate is the origination fee on the new loan, which typically ranges from 1%–8% of the loan amount.

When Refinancing Makes Sense

Your credit score has improved substantially: If you took out a loan at 28% APR with a 590 credit score and your score is now 680, you may qualify for 16%–20% APR — potentially saving hundreds or thousands of dollars over the remaining loan term.
Market interest rates have fallen: If rates across the board have dropped significantly since you borrowed, you may qualify for a better rate even without a credit improvement.
You want to lower your monthly payment: Extending the loan term (e.g., from 24 months remaining to 36 months) lowers the monthly payment, though you will pay more in total interest.
You want to pay off debt faster: Refinancing to a shorter term at the same or lower rate can accelerate payoff without a significant payment increase.
Your current lender charges a high prepayment penalty: If you can refinance to a lender with no prepayment penalty, you gain flexibility to pay extra toward principal.

When Refinancing Does Not Make Sense

You are near the end of your repayment term — most of the interest has already been paid
The origination fee on the new loan offsets the interest savings
Your credit score has not improved and you would not qualify for a meaningfully lower rate
Your current loan has a substantial prepayment penalty that makes early payoff costly

Old Loan vs. New Loan: A Sample Comparison

	Original Loan	Refinanced Loan
Principal (remaining balance)	$8,000	$8,000
APR	26%	15%
Remaining term	36 months	36 months
Monthly payment	$318	$277
Total interest paid (remaining)	$3,448	$1,972
Origination fee (2% of new loan)	—	$160
Net savings	—	$1,316

In this example, the refinance saves $1,316 after accounting for the origination fee. The monthly payment drops by $41, and total interest cost falls by more than $1,400. This is a clear win. If the APR savings were smaller — say, dropping from 26% to 22% — the origination fee might consume most of the benefit, especially if you are only 6 months from payoff.

The Break-Even Calculation

If the refinance involves a fee, calculate how long it takes to break even:

Break-even (months) = Refinance Fee / Monthly Savings

Example: $160 origination fee / $41 monthly savings = 3.9 months to break even. Since there are 36 months remaining, the refinance is clearly worthwhile. If break-even were 20 months on a 24-month remaining term, it would not be worth it.

How to Refinance: Step by Step

Check your current loan terms: Confirm the outstanding balance, remaining term, current APR, and any prepayment penalty.
Check your credit score: Use your bank or a free monitoring service. Know where you stand before approaching lenders.
Pre-qualify with multiple lenders: Use soft-inquiry pre-qualification tools at three to five lenders to compare potential rates without affecting your score. See our guide on how to get approved for a personal loan.
Run the math: Compare the total interest you will pay under the new loan (including any origination fee) against remaining interest on your current loan.
Submit your formal application: Once you identify the best offer, submit a formal application. The lender will run a hard inquiry.
Pay off your existing loan immediately: Once funded, use the new loan proceeds to pay off the old loan in full. Confirm payoff with your old lender to avoid any missed payments.

What Refinancing Does to Your Credit Score

Refinancing has a modest short-term impact on your credit: the hard inquiry from the new application drops your score by 5–10 points temporarily. Additionally, opening a new account and closing the old one can affect average account age. However, making on-time payments on the new loan will rebuild any minor score dip within a few months. See our full guide on how loans affect your credit score.