How do I refinance a personal loan?

Refinancing a personal loan means taking out a new loan at a lower rate (or better terms) to pay off your existing loan. It makes sense when your credit has improved, rates have dropped, or you need to lower your monthly payment — and the savings outweigh the fees.

Personal loan refinancing isn't as common as mortgage refinancing, but the logic is identical: you replace a higher-rate loan with a lower-rate loan, ideally with no or minimal fees, to reduce your total interest cost or lower your monthly payment. Unlike balance transfers, there's no promotional rate that expires — the new rate is fixed for the life of the loan.

When refinancing a personal loan makes sense

Your credit score has improved significantly. If you took out a loan at 680 FICO and now have a 740, you may qualify for a rate 3–8 percentage points lower.
Market rates have dropped. Personal loan rates loosely track the Fed funds rate — when rates fall, refinancing options improve.
You need a lower monthly payment. Extending the term lowers the payment but increases total interest. Run the math before choosing a longer term purely for cash flow.
You want to consolidate multiple personal loans into one simpler payment.

When NOT to refinance

Your existing loan has a prepayment penalty that erases the savings.
The new origination fee exceeds what you'd save in interest before payoff.
You're near the end of your current loan term — most interest is already paid (amortization front-loads interest).
Your credit score has dropped since the original loan — you may get a higher rate, not lower.

Step-by-step: how to refinance

Check your current loan terms. Find the remaining balance, remaining term, current APR, and any prepayment penalty. Your loan agreement or lender account portal has this.
Check your credit score. A 20+ point improvement since the original loan is a strong signal to shop. See How to Check Your Credit Score for Free.
Calculate your break-even point. Divide the upfront costs (origination fee, prepayment penalty) by your monthly savings. If you'll pay off the new loan before you break even, refinancing costs you money.
Pre-qualify with multiple lenders using soft-pull tools. Compare APR — not just interest rate. The APR includes the origination fee amortized over the loan term.
Apply with the best offer. This triggers a hard inquiry. Use the funds immediately to pay off your existing loan — don't let the old balance accumulate interest.
Confirm the payoff. Check your old account 1–2 weeks after closing to confirm the balance is zero. Report any discrepancy to the new lender.

What refinancing does to your credit

Refinancing involves a hard inquiry (small temporary dip) and closes an old account while opening a new one. Closing the old account reduces average account age. These are usually minor and temporary. The CFPB notes that the long-term benefit of lower utilization and on-time payments on the new loan typically outweighs the short-term inquiry impact.

Key figures

The Federal Reserve's G.19 report tracks average interest rates on 24-month personal loans at commercial banks, providing a benchmark for refinancing decisions. — Federal Reserve
The CFPB recommends comparing the APR — not just the stated interest rate — when evaluating any new loan, as origination fees are included in the APR calculation. — CFPB

Key takeaways

Refinancing makes sense when your credit has improved, rates have dropped, or you need a lower payment — and the savings exceed the fees.
Calculate break-even: upfront costs ÷ monthly savings = months to recoup.
Watch for prepayment penalties on your current loan and origination fees on the new one.
Compare APR (not just rate) and pre-qualify with soft pulls before committing.
Avoid extending the term just to lower the payment — you'll pay more interest over time.