Can you refinance a personal loan? Here's how

Borrowers may choose to refinance their personal loans for a variety of different reasons, such as:

• Your situation has changed: Perhaps your income and expenses have changed, or your credit score has improved since you first took out the loan, and your current loan no longer suits your needs.
• You want to borrow more money: Refinancing to a larger personal loan could help you access money to pay for a personal project, or to consolidate other debts.
• Get a better deal: Switching to a personal loan with a lower interest rate or fees could help you enjoy more affordable repayments, or more flexible features and benefits that better suit your needs.

• Exit fees: Some lenders charge fees when you repay a personal loan early, including when you refinance.
• Upfront fees: When you start a new personal loan, the lender may charge a fee to help cover the admin costs of processing the application.
• Changing the loan term: Refinancing to a personal loan with a longer loan term could help you pay less in repayments from month to month. However,  a longer loan term means you may pay more interest on the loan in total, even if your new interest rate is lower.

If your personal loan is secured, such as a car loan, you can still refinance, but the lender may have additional requirements.

• Collateral evaluation – The lender will check if the asset (e.g., your car) still holds enough value to secure the new loan. If the car has depreciated significantly, you may need to provide an alternative asset or switch to an unsecured loan, which might have a higher interest rate.
• Lender policies – Some lenders don’t allow borrowers to switch from secured to unsecured loans, so it’s essential to check your lender’s terms before applying.

1. Compare alternative personal loans: Use filters to shortlist only the personal loan options that will best suit your needs.
2. Calculate your new repayments: Compare the new loan’s repayments to your current loan to work out how much you could save.
3. Check your credit score:Borrowers with good credit may have an easier time getting lower interest rates than bad credit borrowers.
4. Check if you can negotiate with your current lender: You may be surprised by what a lender is willing to offer to keep your business.
5. Collect the necessary documents:Different lenders will have different requirements, but you may need to provide details of your income, expenses, and any security assets.
6. Contact a lender to apply: You may be able to apply online, over the phone, or in person at a branch.
7. Pay off and close your old loan: Once your new loan has been approved, you can use the money to pay off the outstanding debt and close the account.
8. Start making repayments on your new loan: Make sure you’ve budgeted for the interest charges and fees. 

Refinancing a personal loan can impact your credit score, but the effect also depends on how you manage the new loan. When you apply for a new loan, lenders conduct a hard credit inquiry, which may slightly lower your score. Multiple applications in a short period can amplify this effect.

However, if you manage the new loan well, your credit score will likely recover. Refinancing can even improve your score over time, especially if it helps you consolidate debt or make repayments more manageable. Reducing outstanding balances and making timely payments demonstrates financial responsibility to lenders.

On the other hand, missing payments or struggling with the new loan could hurt your credit score. Additionally, closing an older loan account may shorten your credit history, which can also have a negative impact. While refinancing may cause a temporary dip in your score, it can still be a smart financial move if it helps you secure better loan terms and avoid defaulting on repayments.