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Can You Refinance A Personal Loan?

Can You Refinance a Personal Loan

Is there ever a good time to refinance your personal loan? There is, but the conditions should be just right before you try. Otherwise, you could end up paying more in the long run.

If you’re currently repaying a personal loan, and you feel buried beneath payments you can’t afford, refinancing could be in your best interest. Here’s everything we know about the benefits and disadvantages of refinancing a personal loan.

What Does It Mean To Refinance A Personal Loan?

When you refinance a loan, it means you’re taking out a new loan to pay off the existing one. If you’ve made the majority of your payments, refinancing would not be to your benefit because you would essentially lose all the money you’ve paid in.

But, if it’s still early in your loan and your circumstances have changed, speaking to a loan officer at your bank or credit union could work to your advantage in the following ways:

  • You may lock in a lower interest rate.
  • Your monthly payment amount could drop.
  • The life of your loan could be extended.

Essentially, the only reason you would want to refinance a personal loan is if it will lower your monthly payment or interest rate. You may also want to talk about refinancing if your income or circumstances have changed, and you’re having trouble meeting your loan obligation.

Which Factors Affect The Interest Rate On Your Refinanced Loan?

Multiple factors may impact the interest rate on your refinanced loan. Your lender will likely consider them all, and these factors could work for you or against you, accordingly. These include:

Credit Rating

A higher credit score is a great way to seal the deal on a lower interest rate. This means if your current loan requires 12% interest because you had spotty credit when you first applied, you may want to refinance if your score changes.

Raising your credit score can shave significant dollars off the cost of your overall loan. It will also cause your monthly payment to decrease, one of the main reasons why you may want to refinance a personal loan in the first place.

Annual Earnings

Sometimes, changes in your employment status may make refinancing necessary. If you’ve lost your job, for instance, or if your income has gone down since you first applied, refinancing could help lower your payments so they’re less of a burden to meet each month.

Debt-to-Income Ratio

Your amount of available credit versus how much credit you’re using may also affect your loan’s interest rate.

For best results, your debt-to-income ratio should sit at 30% or below. This means that if you have $20,000 of credit available, you should utilize no more than $6000 at any given time. If you have multiple credit cards, and they’re all charged to the maximum, this will likely raise your interest rate. It’s in your best interest to pay them down as soon as possible.

Employment History

Having a steady job is a big advantage when it comes time to purchase a loan. Most lenders require a minimum of 24 consecutive months of consistent employment, but if you have more, it could buy you a lower interest rate on your personal loan.

Amount Borrowed

It may be easier to obtain a personal loan or refinance an existing loan if you’re asking for less money. The less money you borrow, the less you’ll be required to pay back over the life of the loan. This may help set your lender’s mind at ease and make them more willing to approve your loan.


If you’re in a bind, your lender may accept a form of collateral in exchange for approving your refinanced loan.

For instance, if you’re purchasing a car, the car could act as collateral. Your savings or certificates of deposit may also suffice.

Should You Refinance Your Personal Loan?

Just because your lender is willing to refinance your personal loan, will it actually work to your benefit?

If little has changed regarding interest rates, your income, or more, then refinancing may not make sense. And if you’re nearing maturity of your loan, starting all over again may be a step backward. However, in some situations, refinancing is a good idea. If you’re trying to avoid a balloon payment at the end, for example. Or, if you have a variable-rate loan and your monthly payments fluctuate, a refinance with a different type of rate could resolve the issue.

How Refinancing Can Impact Your Credit

Refinancing a personal can both hurt and help your credit score.

First, it will put one or more hard inquiries on your credit report when lenders pull your credit to check your score. Second, when you refinance, the first account is closed, which can also lower your score temporarily. However, if you use a personal loan to consolidate debts such as credit cards, this may raise your credit score by freeing up available credit.

Before you apply for a refinance on your personal loan, reach out today and speak with our team at Jeanne D’Arc Credit Union. We’ll help you lock in the best rates possible for your unique situation.

Learn More About Personal Loans

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