Can you refinance a personal loan? Here's how
It is possible to refinance a personal loan, provided you can afford the repayments. Refinancing a personal loan is a lot like initially applying for a personal loan, with a few key differences.
How does personal loan refinancing work?
Much like refinancing a home loan, refinancing a personal loan involves taking out a new personal loan to replace your existing loan.
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.
What are the costs of refinancing a personal loan?
- 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.
What if my personal loan is secured?
You can still refinance a secured personal loan such as a car loan, provided you fulfil the lender’s eligibility criteria.
The lender may need to confirm that the asset you’re using as collateral for the loan still holds enough value to secure the refinanced loan.
For example, if you’re refinancing a secured car loan, the lender may want to confirm whether the car has depreciated in value since you first took out the loan. If it’s no longer suitable to secure the loan, you may need to provide an alternative asset as collateral, or switch to an unsecured loan, which may have a higher interest rate.
How to refinance a personal loan
- Compare alternative personal loans: Use filters to shortlist only the personal loan options that will best suit your needs.
- Calculate your new repayments: Compare the new loan’s repayments to your current loan to work out how much you could save.
- Check your credit score:Borrowers with good credit may have an easier time getting lower interest rates than bad credit borrowers.
- 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.
- 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.
- Contact a lender to apply: You may be able to apply online, over the phone, or in person at a branch.
- 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.
- Start making repayments on your new loan: Make sure you’ve budgeted for the interest charges and fees.
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Product database updated 04 Mar, 2024