Refinancing a personal loan requires jumping through many of the same hoops you did when securing the original loan. You'll need to convince a lender that you have the income necessary to pay off the debt, and the credit history that suggests you'll honor your obligation to do so. You'll have an easier time refinancing if your credit score is high, because a personal loan is unsecured debt that is harder to collect in case of default and bankruptcy.
Research Your Options
Before you apply, order copies of your credit report, and check for any inaccuracies. You can get a free copy of your reports from Equifax, Experian and TransUnion at Annualcreditreport.com. This won't give you your credit score, however, so you may have to pay a small fee, if you want that information to better gauge what your interest rate on a refinanced personal loan might be. Correct any mistakes by filling out the dispute form that each of the three reporting agencies provides. Fixing an error now can save money later if it impacts the ultimate cost of your loan.
In addition, check the rates on personal loans from your local banks and credit unions, as well as online options. Plug the numbers into a loan calculator to see how much your payments would be under different scenarios. This lets you know which options best suit your needs, and the minimum loan term and interest rate that makes a refinance worthwhile.
Qualifying for a Refinance
Creditors base their lending decisions largely on your income, current debt and credit history. Compare your financial situation to what it was when you took out the original personal loan. You may be able to qualify for a lower rate if you've made your regular payments since taking out the original loan and your credit score has improved.
Even if your credit score has stayed the same, you may be able to take advantage of lower interest rates or promotional offers from a different lender. If you find a better offer elsewhere, take that information back to your current lender; They may be willing to match the offer in order to keep your business.
If your credit profile has gotten worse, you'll have a more difficult time finding a lender. You'll also pay much higher interest rates -- up to 41.5 percent according to a March 2015 Lending Tree study -- which makes a refinance much less palatable, unless you're desperate to extend your existing loan's terms to avoid default.
The Application Process
Refinancing a personal loan works much the same as taking the original loan did, though the process may be streamlined if you stick with your original lender and it has some of your information already on file. Starting with your current lender also gives it the opportunity to present its best offer in order to keep your business, and it may be in a better position to meet your needs based your history with that particular financial institution. For example, if you hold additional savings accounts at a particular bank and have made every personal loan payment on time thus far, it may consider you less of a default risk than another bank would.
Regardless of whether you choose your current lender or a new one, you give the prospective lender the authority to pull a copy of your credit report. The lender will scrutinize both the credit score and your past activity. You also will be asked to provide information on your income, either by scanning and electronically remitting the documents, dropping them off in person, or delivering them by some alternate means. The lender likely will want recent pay stubs, as well as a job history to demonstrate the stability of your income.
The lender will provide you with the details of your loan offer. Scrutinize this offer carefully. Compare the offer to your current credit terms to make sure you're meeting your goals for the refinance. Personal loans often carry an origination fee, and a refinance is no exception. Those costs don't get refunded if you pay the balance early. Factor that in, as well as any other fees, closing costs and prepayment penalties that increase the cost of the loan.
When examining your loan offer, look at the annual percentage rate, or APR, rather than focusing on the interest rate. The APR includes the origination fee, and is calculated assuming that you don't pay off the loan early, giving you a more accurate measure of how much you'll be paying to borrow the funds.
Getting the Funds
Once you're approved, you'll sign the required paperwork and take out a new personal loan that folds in the original. The new lender often will then electronically remit the funds to the holder of the original note. If not, you'll have to perform this activity yourself.