Is it worth refinancing your personal loan?

Key points

• Any personal or car loan can in principle be refinanced: a new loan pays out the old one at a cheaper rate. Plenty of people simply never find this out.
• Whether it's worth doing comes down to four numbers: remaining balance, remaining term, the rate gap and the fees. The sums take minutes.
• A lower repayment is not automatically a saving. Refinancing onto a longer term can cut your repayment and still cost you more overall.
• Sometimes the honest answer is that the saving is too small to justify the effort, and staying put is the right call.

Some of our members were carrying loans at painful rates without knowing refinancing was possible – nobody had ever told them an existing loan can simply be replaced. Others knew, and had looked at the modest saving on offer against the paperwork involved and decided, reasonably, that their time was worth more. Both groups needed the same thing: a quick, honest way to tell whether switching a loan is worth it, before anyone fills in a form.

So is it worth refinancing your personal loan? The answer is sometimes (it comes down to four numbers: your remaining balance, the term left, the rate gap and the fees) – and the sums take minutes. Below we work through them, including an example where the right answer is to stay put.

Can you refinance a personal loan at all?

Yes – refinancing means taking a new loan at a better rate and using it to pay out your existing loan's payout figure, after which the old loan is closed and you repay the new one. It works for unsecured personal loans and for car loans, with the extra complexity that car loans are usually secured, so the new lender may take, or release, the security depending on the product. There's no rule that says you must stay with the lender who wrote the original contract, and no loyalty discount for staying.

The payout figure is the first number to get, and it's not the balance in your app. Ask your current lender for it: it includes interest to the discharge date and any early-repayment or exit fees your contract charges. Fixed-rate loans in particular can carry break costs. One phone call gets you the exact number, and from there it's just maths.

Work out whether switching saves you money

With the payout figure in hand, the comparison needs three more inputs: your remaining term, the rate you're paying, and the rate, fees and term of the alternative. Work out what staying costs: your current repayment times the months remaining. Work out what switching costs at the same remaining term: the new repayment times the same months, plus every fee on both sides (the new loan's establishment fee and your old loan's exit fees). The difference is your true saving, and the fees divided by the monthly saving tells you how many months until the switch has paid for itself. The comparison rate on any loan you consider is a useful shortcut for bundling interest and standard fees into one number, and matching the term is what keeps the comparison honest.

Take an example loan: $15,000 with three years left at 14.5% costs $516.31 a month and about $3,587 in remaining interest. Below is what refinancing could look like:

The same loan gives three different answers. The first refinance saves real money, though the break-even at month 16 means you need to keep the new loan past that point for the switch to have been worthwhile. The second shows what extending the term does: the repayment falls by almost $200 a month, which feels like a win, however the two extra years of interest cost more than the rate cut saves. The third is the case our members told us about: a rate gap too small to make sense after the fees. The comparison has to be able to come back with "stay put", otherwise it isn't really a comparison.

When is refinancing not worth it?

Quite often. Small remaining balances rarely justify fees, because the interest left to save shrinks faster than the fees do. Loans near the end of their term have little interest remaining regardless of rate. Rate gaps under a couple of percentage points struggle to clear even modest fees. And exit costs on the old loan, especially fixed-rate break costs, can eat a saving that looked healthy on rates alone.

Your effort counts too. Our members told us about refinance processes that demanded documents out of proportion to the benefit, and about deciding the hassle wasn't worth a small monthly difference. That's a reasonable trade, not laziness, and it's completely fine to decide the saving doesn't buy the hassle. Worth knowing though: application processes at many lenders have become much lighter in recent years, so if your memory of the process is from a painful bank application years ago, it may be out of date, and it costs nothing to find out.

Refinancing is a cost decision for a loan you can afford. If the repayments themselves are failing, the answer isn't a marginally cheaper loan – contact your lender's hardship team and the National Debt Helpline on 1800 007 007, both of which can change your position without a new application.

If it's worth it, the process is short

The steps: get the payout figure, compare using matched terms and comparison rates, apply once to the lender whose offer actually beats your numbers, and the new lender pays out the old loan (or you do, immediately, if the funds come to you). Confirm the old loan is discharged and closed, in writing, and check that any linked direct debits are cancelled with it.

Most of the effort sits in gathering documents, so do it before applying rather than mid-application. Lenders typically want identification, recent payslips, sometimes bank statements, and the details of the loan being paid out, including that payout figure. Having them in one folder turns the application into a form-filling exercise instead of days of email round-trips, which is where our members told us refinance attempts used to fall apart. The whole exercise is one afternoon of gathering and one application.

If the personal loan isn't alone – if it sits beside credit cards or buy now pay later balances that are also expensive – the single-loan break-even becomes a narrower version of a bigger question, and it's worth broadening the comparison to whether consolidating several debts into one loan beats fixing one loan at a time. The same rules apply, just with more moving parts.

The WeMoney app can show your loans, balances and repayments in one place once your accounts are connected, which makes assembling the four numbers faster. When you're ready to compare refinance or consolidation options, the app gives you personalised offers and an approval score, so you know your chances before applying – it doesn't damage your credit file, and there are no hard checks a lender can see. The break-even method above applies unchanged to anything you are offered, from anyone.

Sources

• Moneysmart: Personal loans
• Moneysmart: Urgent help with money

This article provides general information only. It does not take your personal circumstances into account and is not financial, credit or legal advice. Consider your own situation and seek advice from a suitably qualified professional if you need it.