Yes, you can refinance a personal loan, but whether it saves you money depends on your credit score and current interest rates

Refinancing a personal loan means taking out a new loan to pay off the old one. The new lender pays your original lender in full, and you start making payments to the new lender instead. People refinance for one main reason: to lower their interest rate, which reduces what they pay each month and over the life of the loan.

Whether refinancing makes financial sense depends on three things: whether your credit score has improved since you took out the original loan, whether interest rates have dropped, and whether the fees charged by the new lender are low enough that you'll save money overall. If your credit score has stayed the same or dropped, or if rates have risen, refinancing will likely cost you more, not less.

Key Takeaways

  • Refinancing works only if your credit score has improved or interest rates have fallen enough to offset the new lender's fees.
  • The new lender will run a hard credit inquiry, which temporarily lowers your credit score by a few points.
  • You should compare the total cost of your current loan against the total cost of the new loan, including origination fees and prepayment penalties.
  • Some lenders charge a prepayment penalty if you pay off your original loan early, which can wipe out your savings from refinancing.
  • The refinancing process typically takes three to seven business days from process to funding.

When refinancing actually saves you money

Refinancing saves money when the interest rate on the new loan is meaningfully lower than your current rate. "Meaningfully" matters because the new lender charges fees—typically an origination fee of 1 to 8 percent of the loan amount—that you have to recoup through lower monthly payments.

For example, if you owe $10,000 on a personal loan at 12 percent interest with three years left to pay, and you refinance to a 9 percent loan, the monthly payment drops. But if the new lender charges a 5 percent origination fee ($500), you need to stay in that loan long enough for the lower payments to make up that $500. If you plan to pay off the loan in six months, refinancing costs you money. If you plan to keep it for two years, you likely come out ahead.

Your credit score is the biggest factor in whether you'll get a lower rate. If your score has improved since you took out the original loan—because you've paid bills on time, paid down other debts, or corrected errors on your credit report—lenders will offer you better rates. If your score has dropped or stayed flat, you won't see a lower rate, and refinancing will cost you more.

What happens during the refinancing process

When you explore to refinance, the new lender pulls your credit report and runs a hard inquiry. This temporarily lowers your credit score by a few points—usually between 5 and 10 points—and stays on your report for about a year. If you're shopping around with multiple lenders, try to submit all applications within 14 days; credit bureaus count multiple inquiries in a short window as a single inquiry, so the damage is less.

Once approved, the new lender sends the loan funds directly to your original lender to pay off the balance in full. You receive confirmation that the old loan is closed, and you start making payments to the new lender. The whole process usually takes three to seven business days from approval to funding.

During this time, you're responsible for making your regular payment to the original lender unless the new lender has already sent the payoff funds. Check with your original lender about their payoff process so you don't accidentally miss a payment and damage your credit.

Prepayment penalties and other hidden costs

Before you refinance, check whether your current loan has a prepayment penalty. This is a fee your original lender charges if you pay off the loan early. Some lenders charge a flat fee; others charge a percentage of the remaining balance or a certain number of months' worth of interest. If your loan has a prepayment penalty, that cost comes out of your refinancing savings.

For example, if refinancing would save you $1,200 over two years but your current lender charges a $500 prepayment penalty, your actual savings drop to $700. You can find out whether your loan has a prepayment penalty by checking your loan agreement or calling your lender and asking directly.

The new lender's origination fee is the other major cost. This fee covers the lender's cost to process and fund the loan. It's typically deducted from the loan amount you receive, so if you borrow $10,000 and the origination fee is 5 percent, you receive $9,500 and owe back $10,000. Some lenders advertise "no origination fee," but they may charge other fees instead, so compare the total cost, not just one line item.

How to compare your current loan to a refinance offer

To know whether refinancing saves money, you need to calculate the total cost of both loans. Start with your current loan: multiply your monthly payment by the number of months remaining. That's the total you'll pay if you do nothing.

For the refinance offer, add the origination fee to the total of all monthly payments on the new loan. Subtract any prepayment penalty from your original loan. The difference tells you whether you come out ahead.

Many lenders provide a "Loan Estimate" document that shows the interest rate, monthly payment, origination fee, and total interest you'll pay over the life of the loan. Request this from any lender you're considering, and compare the total interest and fees across offers. The lender with the lowest total cost is usually the best choice, though you should also check whether they have a good reputation for customer service and whether they offer flexible payment options.

Reasons not to refinance

Don't refinance if you're close to paying off the loan. If you have six months left on a three-year loan, the savings from a lower rate probably won't cover the origination fee and the temporary credit score dip.

Don't refinance if your credit score has dropped since you took out the original loan. You'll be offered a higher rate, not a lower one, and refinancing will cost you money.

Don't refinance if you're planning to pay off the loan very soon. The fees and credit inquiry aren't worth it if you're paying the loan off in a few months anyway.

Don't refinance if your current loan has a very high prepayment penalty. Some older loans charge penalties equal to several months of interest, which can eliminate all your savings.

Alternatives to refinancing

If refinancing doesn't make sense for your situation, you have other options. You can straightforward keep paying your current loan as scheduled. There's no penalty for doing this, and you'll own the loan free and clear on the original timeline.

If you're struggling with monthly payments, contact your current lender and ask whether they offer a loan modification or forbearance program. Some lenders will extend your loan term (making payments smaller but the loan longer) or temporarily pause payments if you're facing hardship. This doesn't lower your interest rate, but it can ease cash flow pressure.

If you have multiple debts and want to simplify payments, you might consider a debt consolidation loan instead of refinancing. A consolidation loan pays off several debts at once—credit cards, medical bills, other personal loans—into a single new loan. This is different from refinancing because you're combining multiple debts, not just replacing one loan with another.

Frequently Asked Questions

Will refinancing hurt my credit score?

Yes, but only temporarily. The hard inquiry from the new lender lowers your score by a few points, usually 5 to 10. This dip fades over several months. If you make on-time payments on the new loan, your score will recover and likely improve over time because you're demonstrating responsible borrowing.

Can I refinance if I have bad credit?

You can explore, but you probably won't get a lower rate. Lenders offer lower rates to borrowers with higher credit scores. If your score is lower than when you took out the original loan, refinancing will result in a higher rate, not a lower one. Focus on improving your credit score first by paying bills on time and paying down other debts.

How long does refinancing take?

From process to funding usually takes three to seven business days. The exact timeline depends on how quickly you provide documents, how quickly the lender processes your process, and whether there are any issues with your credit or income verification. Some lenders are faster than others, so ask about their typical timeline when you explore.

What if I want to refinance but my lender won't let me?

Your original lender can't prevent you from refinancing. However, they can charge a prepayment penalty if your loan agreement includes one. Read your loan agreement to see whether a penalty applies, and factor that into your decision about whether refinancing makes sense.

Can I refinance a personal loan multiple times?

Yes, you can refinance as many times as you want, but each refinance involves a hard credit inquiry and origination fees. Refinancing multiple times in a short period can damage your credit score and cost you money in fees, so it only makes sense if rates drop significantly or your credit score improves substantially between refinances.