How to refinance a personal loan?

Refinancing a personal loan means taking out a new loan (usually at a lower rate) and using it to pay out the one you already have, so from then on you're repaying the new loan on its rate and its term. You can do it with a different lender or your current one, at any point in the life of the loan.

The rate on the loan you hold reflects how your credit file looked at the time you applied. If your score has improved since, or lenders' rates have moved, personal loan refinancing lets you swap to something closer to what you'd be offered today, however the switch only pays off when the new loan costs less in total after every fee, and that's the part this guide works through. (If you're after the basics first, we've covered what refinancing is and how it works.)

Should you refinance your personal loan?

It's worth considering when the new loan would cost you less in total than staying put (after the fees on both sides, and on a term that isn't longer than what you have left). That generally takes a rate meaningfully below your current one, exit and establishment fees that are small next to the interest saving, and a term the same as or shorter than the remainder of your current loan.

Your credit position probably matters more here than you'd expect. Lenders price personal loans to the applicant, so if you've spent a couple of years making repayments on time since you took the loan out, you may be offered better now than you were then. You may qualify for a lower rate, subject to the lender's assessment, and it's worth knowing where you stand before anyone runs a check.

Pro tip: You can check your credit score in WeMoney first, for free, with no damage to your credit file, and no hard checks a lender can see.

What does refinancing actually save?

What the rate gap saves you over the term you choose, after the fees on both sides (the term matters as much as the rate here, so a lower rate over more years can still cost more). Below is the same $15,000 loan under three choices: staying put, refinancing on the remaining term, and refinancing on a longer one.

Illustrative example at an assumed 14% current rate and an assumed 10% new rate, not an offer, quote or advertised rate.

The middle column is the straightforward case: the same debt over the same 4 years, with ~$1,414 less repaid in total (~$7 a week back). The right-hand column shows how a refinance with a lower rate can still cost more. The repayment falls by ~$132 a month, which can be exactly what a tight budget needs, however the extra 2 years of interest cost more than the lower rate saved. This loan ends up ~$333 more expensive than not refinancing at all. A longer term can lower the repayment and still cost you more in total, so choose the term deliberately rather than choosing a loan just because its monthly repayment is the smallest.

Fees come off the saving before you count it. If leaving your current loan costs a $150 early-exit fee and the new one charges a $300 establishment fee (illustrative), that ~$1,414 saving becomes ~$964. That's still a saving, however on a smaller loan or a smaller rate gap, the fees can be bigger than the saving entirely. The comparison rate helps here (it folds most fees into a single percentage, and it's required by law to be shown wherever a rate is advertised for this kind of loan), so put comparison rates side by side rather than advertised rates.

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What's the difference between refinancing and consolidating debt?

Refinancing replaces one loan, consolidating combines several (the mechanics are the same either way, because a new loan pays out old debt). Consolidating rolls two or more debts (credit cards, a personal loan, Afterpay or Zip balances) into one new loan, so it's as much about getting to a single repayment as it is about the rate. If several debts are the actual problem, start with how to compare debt consolidation loans, and the working-out for whether consolidating saves you money has its own guide.

How do you refinance a personal loan?

Five steps, and the order matters (comparing before applying keeps unnecessary enquiries off your credit file):

1. Check your credit score. It gives you a rough idea of the rates you might be offered, before anything goes on your file.
2. Get the payout figure on your current loan. Ask your lender what it costs to close the loan today, which is the balance plus any early-exit fee. This is the number a new loan has to beat.
3. Compare loans on the comparison rate and the total repaid over the term. Not the monthly repayment on its own. It's also worth five minutes on the lender itself, and what to look for in a reputable lender covers licensing, fees disclosed up front, and what happens if things go wrong.
4. Apply once, for the loan you've chosen. A full application is recorded on your credit file as an enquiry, so compare first and apply once rather than applying to see. You may qualify subject to the lender's assessment, and if the application is declined, that's one lender's decision at the time they assessed you, not every lender's.
5. Pay out the old loan and confirm it's closed. Some lenders pay your old lender directly, others put the funds in your account for you to pay it out. Either way, check the old loan has gone down to zero and been closed (not just paid down), so you're not left with an open account or a stray monthly fee.

If you're after a quick way to keep on top of it all, connecting your accounts in WeMoney shows your loans and repayments in one place, so you can see the old loan close and the new repayment start.

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Can you refinance a personal loan with bad credit?

Sometimes (each lender sets its own criteria, and some are built for people whose credit has taken a knock). Expect a higher rate to come with it, which changes the maths: refinancing only makes sense if the new loan still costs less than the one you're in, and at bad-credit rates that's not a given, so run the total-cost comparison above before you apply. If what you're really trying to refinance is several debts at once, consolidating loans with bad credit covers the realistic options.

When refinancing isn't the answer

Refinancing helps when the loan is more expensive than it needs to be. It can't help when the repayments themselves are more than you can afford. A new loan rarely fixes that, and applying for credit while you're behind can make things harder. Your lender's hardship team exists to work out a change to your repayments with you, and the National Debt Helpline on 1800 007 007 is free, independent and confidential, and the financial counsellors there do exactly this work.

Key points

• Refinancing a personal loan means a new loan pays out your existing one, and it's worth considering when the new loan costs less in total than staying put, after the fees on both sides.
• Compare loans on the comparison rate and the total amount repaid over the term, not the monthly repayment alone.
• A longer term can lower the repayment and still cost you more in total. In the worked example above, the lower-rate, longer-term loan cost more than not refinancing at all.
• Refinancing replaces one loan, while consolidating combines several debts into one. If several debts are the problem, compare debt consolidation loans instead.
• Every full loan application is recorded on your credit file as an enquiry, so compare first and apply once.
• If the repayments are already unmanageable, your lender's hardship team and the National Debt Helpline (1800 007 007) come before any new loan.

This article is general information only, and it doesn't take your circumstances into account.

Sources

• Moneysmart: Debt consolidation and refinancing
• Moneysmart: Personal loans
• National Debt Helpline