Can I refinance a personal loan?

Key takeaways

• Refinancing a personal loan could mean a cheaper interest rate or lower monthly repayments.

• If your credit score has improved you may be eligible for a loan with better rates.

• There may be early repayments fees to pay and your credit score could be hit temporarily.

What does refinancing a personal loan mean?

If you refinance a personal loan, it simply means you are taking out a new personal loan and using the money to pay off your old loan.

You might do this to lower the interest rate you’re paying on the loan, or to change the length of the time you need to pay back the loan, which can lower your monthly repayments.

There are pros and cons to refinancing a personal loan, you could get a cheaper interest rate and monthly payments, making the loan more affordable to pay back. But there are no guarantees this will happen and there may be fees to pay for paying off your original loan early.

When is refinancing a personal loan worth it?

There are a few reasons why refinancing a personal loan can pay off, they include:

• If I want a lower interest rate: you may be eligible for a personal loan with a cheaper interest rate. If you are, the interest rate will go down which means you will pay back less money, because you are paying smaller interest payments.

• If I need lower monthly repayments: if you’re struggling to make your monthly payments, you may be able to extend the loan length time. This could make your monthly payments smaller and more affordable.

• If I want to pay my loan off sooner: paying off a loan could simplify your finances, especially if you’re looking to consolidate your debts and just have one monthly payment you make to one provider a month, instead of multiple payments to different loan providers.

• If you want to clear your loan: your income may have risen since you first took your loan out and if you refinance your personal loan, you may be able to pay it off faster. Your monthly payments may rise, but you’ll still save money overall as you’ll be paying less interest.

• If you want to borrow more money: you may be able to take out a new loan for a larger sum of money, if your credit score has improved. This could be used to clear existing debts, but you will still end up with a larger amount to pay back.

What are the downsides to refinancing a personal loan?

Refinancing a loan isn’t always the best option, and the following may apply:

• Fees: you might be charged a fee known as an early repayment charge (EPC) for paying your first loan off early. You’ll need to weigh this up with the interest saved if you go ahead.

• Higher interest overall: if you extend the length of the loan time, although your interest payments will go down monthly, as you’re paying back the loan over a longer period you will end up paying back more.

• Credit score hit: a hard credit check will be made if you apply for a new personal loan, and making this application and paying off your old loan may have a temporary impact on your credit score. This could be an issue if you’re planning on applying for credit soon, although repaying the loan can help to boost your credit score again.

What do I need to check on my current loan before I switch?

Before you apply for a new personal loan, you will need to check the details of your current loan. This includes:

• The current balance you owe

• The interest rate you’re paying

• The length of the loan term, and how long you have left

• Any early repayment charges that apply if you pay it back

What’s my settlement figure?

Your settlement figure is the total amount of money you need to pay off your personal loan.

It changes daily, so you will need to request this from your lender. It includes the amount of money left to pay back, any fees or charges that you will need to pay, and the interest you will save will be taken off the amount.

How do I refinance a personal loan?

Every lender will have its own rules but if you decide refinancing a personal loan is the best decision for you, here is a step-by-step guide:

1. Check your credit score: it will give you an idea about the likelihood of being approved for a new loan, with better terms than your current personal loan. You can do this for free with a credit reference agency such as Experian.

2. Look at your existing loan terms: check the outstanding amount, interest you pay and any charges that apply to paying it back early.

3. Calculate your savings: work out if refinancing works for you - for example, it means you will save money with a cheaper interest rate even with early charges taken into account, or you will be able to lower your payments, if you are able to extend the loan term.

4. Compare loan providers: there are lots of personal loans to choose from so always shop around , looking at the loan amount, length, interest rate and fees and charged. Use a free loan eligibility checker to see which loans you may qualify for, without impacting your credit score.

5. Apply for a new loan:

   when you’ve found a new loan, you will need to make a formal application. The lender will ask for more details and if approved it will transfer the funds to you and you can use this to pay off your old loan.

6. Repay your new loan:

   it’s a good idea to set up a direct debit payment to pay off your new loan so there’s no chance of missing a payment.

What are my alternatives to refinancing a personal loan?

Refinancing a personal loan might be your best option, here are some of the alternatives to consider:

• Debt consolidation: you could take out a specific debt consolidation loan if you want to pay off existing multiple debts. If the new loan has a lower interest rate, you should save money overall.

• Overpaying your loan: you may be able to overpay your existing loan, which will reduce the term of the loan and save you money as you will be paying less interest overall.

• Money transfer card: if you’re eligible, a money transfer credit card can be used to pay your loan off with money from your bank account. There is usually a fee to pay but also a 0% interest period, in which you’ll need to clear the balance otherwise you’ll start paying interest on it.

What should I do if I’m struggling to afford my loan repayments?

If you’re struggling to make your monthly personal loan repayments , you have options.

1. Speak to your lender: it should be able to help you to repay the loan, by potentially lowering your monthly repayments or extending the loan time.

2. Seek financial help: there are lots of independent charities and organisations that can provide free, financial advice and guidance. They include StepChange , Turn2Us and the National Debtline .