Refinancing a personal loan means taking out a new loan to pay off your existing one, ideally with better terms — a lower interest rate, a different term length, or both. It's worth considering any time your financial situation has meaningfully improved since you took out the original loan.
When refinancing makes sense
- Your credit score has improved significantly since you took out the original loan.
- Overall market interest rates have dropped since you borrowed.
- You want to change your term — shortening it to pay off faster, or extending it to lower your monthly payment.
- You want to consolidate the loan together with other debts into a single new loan.
How to check if it's actually worth it
- Check your current loan's remaining balance, rate, and term.
- Get rate quotes from a few lenders using pre-qualification (soft inquiry) tools where available.
- Use a loan payment calculator to compare total interest under your current loan versus the new offer.
- Factor in any origination fees on the new loan and any prepayment penalty on the old one, if applicable.
Watch for prepayment penalties
Some personal loans charge a fee for paying off the balance early. Check your current loan's terms before refinancing — a prepayment penalty can offset some or all of the savings from a lower rate.
Shorter term vs. longer term when refinancing
| Goal | Choose |
|---|---|
| Pay less total interest | A shorter term, even if the rate is similar |
| Lower your monthly payment | A longer term, understanding it usually means more total interest |
| Both a lower rate and faster payoff | A shorter term paired with a meaningfully lower rate, if available |
The refinancing process
- Shop and compare offers from multiple lenders, ideally within a short window to minimize the credit impact of multiple hard inquiries.
- Choose the offer with the best total cost for your goals, not just the lowest advertised rate.
- Apply and, once approved, use the new loan's proceeds to pay off the original loan in full.
- Confirm the original loan shows as paid in full on your credit report after the payoff processes.
