Should You Refinance Your Personal Loans? A Quick Guide to Saving Interest

Refinancing can be a smart financial move, but it isn't right for everyone. Here's how to know if you should refinance your personal loan.

Refinancing vs. Consolidation

It's easy to confuse these two terms. Debt Consolidation is the process of combining multiple debts into a single new loan. Refinancing, on the other hand, is the process of replacing one existing loan with a new one, typically to get better terms.

For example, if you have three separate credit card debts, you might consolidate them into one personal loan. If you already have a personal loan but want to get a lower interest rate on it, you would refinance that loan into a new one.

When is Refinancing a Good Idea?

Refinancing is a powerful strategy in two main scenarios:

1. Your Credit Score Has Improved: If your credit score is significantly higher than when you first took out your personal loan, you will likely qualify for a much lower interest rate. A better credit score signals to lenders that you are a lower risk, and they will reward you with better terms.
2. Market Interest Rates Have Dropped: If overall interest rates have fallen since you got your loan, you may be able to refinance into a new loan with a lower rate, even if your credit score hasn't changed.

The primary goal of refinancing is to save money on interest. A secondary benefit might be to lower your monthly payment by extending the loan term, but be careful—extending the term could cause you to pay more in interest over the life of the loan, even if the rate is lower.

Finding the Best Refinancing Lenders

Many online lenders, credit unions, and banks offer personal loans for refinancing. The key is to shop around and compare offers from multiple sources. Look for lenders that allow you to check your rate with a "soft" credit pull, which won't affect your credit score. Pay close attention to not just the APR, but also any origination fees or prepayment penalties.

Calculator Integration: Prove the Savings

Don't just guess if refinancing is worth it—calculate it. Use our debt calculator to see the real-world impact. First, enter your current personal loan details to see your payoff timeline and total interest cost. Then, create a new "debt" with the terms of the potential refinancing loan. The difference in total interest paid will show you exactly how much you stand to save. Make an informed decision by running the numbers first.