If you took out a personal loan to accomplish goals like consolidating debt or making home improvements, you probably locked in an interest rate and term length. This doesn’t mean your initial terms have to stay the same until you pay off the loan in full , though. You can refinance your personal loan and get better terms.
Maybe you have improved your credit score since getting your original loan. Or you may have found a different lender that charges a lower rate or fewer fees.
Refinancing could also be a good idea if you want to extend your term length and make smaller monthly payments, or shorten your term length and pay less in total interest.
Whatever your reasoning may be, there are three important steps to refinancing a personal loan.
1. Review the terms of your personal loan to compare lenders
Before you refinance your personal loan, you should look over your existing term length, APR, and any associated fees. Write down your monthly payment amount and your total remaining balance. Regardless of whether you stay with your current lender or pursue a different option, having a complete understanding of your situation will help you determine what the best deal is for you.
Additionally, check the company’s Better Business Bureau score to make sure it hasn’t changed since you first took out the loan and reflect on your experience with the lender. The BBB assesses a company’s trustworthiness by measuring a business’ responses to customer complaints, honesty in advertising, and openness about business practices.
If you can lower your interest rate without paying additional fees, it may be in your best interest to take that deal. However, some lenders charge an origination fee when you refinance and take it out of the proceeds of your loan. In this case, you’ll have to do some additional calculations.
“You have to factor the cost of those fees into whether or not it makes sense to refinance,” Todd Nelson, senior vice president of strategic partnerships at Lightstream, told Insider. “You have to think about how much money you’re going to save over time with this lower interest rate, and if it compensates you for the fees that you have to pay upfront.”
Once you have all the information you need about your current loan, shop around and see what rates and terms you may qualify for with other lenders.
If you want to find a comprehensive list that compares many lenders, check out our guides on the best online personal loans, best small personal loans, and best personal loans for bad credit.
2. Prepare for the application process
The application process to refinance a loan will be fairly similar to your experience the first time around.
The lender will ask for basic information, and you’ll have to undergo the same screening process you did when you got your original loan. Credit score minimums vary by lender, but most companies take your credit score into account when making an approval decision. Most lenders will perform a soft credit inquiry to give you personalized rates.
Some common information you may need to provide includes:
- Reason for applying for a personal loan
- Contact information including your address, phone number, and email
- Date of birth
- Social security number
- Reason for taking out the loan
- Employment status
- Whether you rent or own your home
- How much you pay for housing each month
- Individual income
- Household income
3. Apply to refinance with your new lender
Once you’ve done your homework and compared rates, term lengths, and fees, it’s time to make a decision. You can refinance with your current lender or bolt for one with better terms.
The lender you choose will probably ask you to provide documents such as pay stubs, bank statements, W-2s, and employer contact information to verify your identity and listed finances.
“One of the nice things about a personal loan is that it’s one of the simplest financial products,” Ibo Dusi, chief operating officer of Payoff by Happy Money, told Insider. “There’s an interest rate that determines the cost of the financing and there is usually an origination fee — but some lenders don’t have that. Other than that, no other fees are common, either for the first time or for refinancing.”
The refinancing process is similar to how you get your initial loan. Just make sure you compare rates and understand the terms you’re getting into before making a decision.
Ryan Wangman is a review fellow at Personal Finance Insider reporting on mortgages, refinancing, bank accounts, bank reviews, and loans. In his past experience writing about personal finance, he has written about credit scores, financial literacy, and homeownership.