Fixed rate personal loans tend to come with costly break fees if you try to leave the fixed period early and refinance (or even pay off the loan early). However, it is still possible to refinance a fixed rate loan, but the process may be expensive. Also known as early termination or exit fees, these costs can be substantial and are designed to compensate the lender for the interest income they would lose if you break the loan early.
Before making any decisions, request a break cost calculation from your lender. This will give you a clear picture of the financial implications of breaking your fixed rate loan.
When deciding whether it may be worth it to make the switch, consider using RateCity’s personal loan switch and save calculator, and be sure to factor in all the fees and charges payable. It may be more cost effective to simply pay off the personal loan in full over the loan term than to refinance to a lower rate.
One risk when you refinance is that you can often end up extending your loan term. If you only had, say, 12 months left to repay your loan, by increasing the loan term another 2-3 years you'll end up paying thousands more in interest charges.
Repayments on a personal loan
To demonstrate the impact of a personal loan interest rate on your overall repayments, RateCity has crunched the numbers on the total interest payable for a 5-year, $30,000 personal loan at two different interest rates.
Personal loan interest rate comparison: impact on repayments
Total repaid over life of loan
Personal loan A
Personal loan B
Source: RateCity.com.au. Note: Hypothetical example for demonstrative purposes of 5-year, $30,000 personal loan on two fixed interest rates of 7.00% and 12.00%. Does not factor in fees.
As you can see, while a 4% difference in interest rates does not seem that significant, by paying a higher interest rate, you could end up paying $4,398 more in interest charges.