Can you refinance a personal loan?

What is refinancing?

Refinancing a loan involves taking out a new loan to pay off an existing one. The idea is to replace your current personal loan with another that offers more favourable terms – for example, a lower interest rate or a longer repayment period.

But it’s important to remember that while refinancing could save you money in the long term, it may also come with extra costs, such as early repayment fees.

Why refinance a personal loan?

Refinancing a personal loan can be helpful in certain situations, particularly if your circumstances or rates on the wider market have changed since you took out the loan.

Some potential benefits include:

• Lower interest rate – if your credit score has improved, or rates are lower now than when you took out your loan, you might qualify for a better deal

• More manageable repayments – extending the loan term could reduce what you pay each month

• Simplified finances – if you have multiple debts, you could consolidate them into a single loan from one provider.

But there are also possible downsides to keep in mind:

• Fees and penalties – you could be charged an early repayment charge (ERC) for paying off your original loan early

• More interest overall – paying back your loan over a longer period could cost more in interest as you'll be paying it for longer

• Impact on your credit score – applying for a new loan will involve a hard credit check that will show up on your credit report (although repaying it on time every month will help to rebuild your score – see below).

How does refinancing a loan affect your credit score?

Refinancing a personal loan can have both short-term and long-term effects on your credit score.

Short-term impact:

• Applying for a new loan involves a hard credit check, which can temporarily lower your credit score

• Your original loan is closed when you refinance. This can lower your credit score because you’re closing a long-term credit account. But if you made repayments regularly and on time, the impact on your score is likely to be minimal.

Long-term impact:

• If refinancing means you're more likely to make your loan repayments on time, your credit score could improve over time.

• Reducing your credit utilisation ratio (the percentage of available credit you’re using) may also have a positive effect on your credit score.

Before applying to refinance a personal loan, use our eligibility checker to see which loans you’re likely to be accepted for. It’s a soft search, so it won’t affect your credit score in any way.

Is refinancing right for me?

Refinancing a personal loan can be a smart move, but only if the benefits outweigh any costs.

You might consider refinancing if:

• You could get a better interest rate than what you’re currently paying

• Your credit score has improved

• You want to consolidate existing debts

• You need to reduce your monthly payments.

You might want to hold off if:

• You’ll be charged a considerable early repayment charge on your existing loan

• You’re close to paying off your current loan

• Your financial situation has worsened since you took out the loan, as you might be offered a worse rate.

How to refinance a personal loan

If you decide to go ahead and refinance a loan, here’s a step-by-step guide to help you through the process:

1. Review your current loan – check your balance, interest rate and any early repayment charges.

2. Check your credit score – a healthy credit score indicates you’re a reliable borrower. Lenders are more likely to offer you the lowest rates if they can see you’re financially responsible.

3. Compare loan options – use our loan eligibility checker to see which loans you’re most likely to be accepted for before you apply.

4. Apply for the new loan – if you’re approved, you can use the funds to pay off your original loan.

5. Start paying off your new loan – as per your loan agreement.

Compare the Market Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.

Alternatives to refinancing

While refinancing a loan is one option, there are other ways to manage a personal loan effectively. Depending on your needs, you could also consider:

Overpaying your existing loan

This can reduce how much interest you pay overall, but you’ll need to weigh this up against any early repayment charges.

Debt consolidation loan

Take out a debt consolidation loan and you can combine debts from multiple lenders into one new loan from a single provider, hopefully with a lower rate of interest.

Money transfer card

A money transfer card lets you transfer cash from the card into your bank account, which you could then use to pay off your loan. You’ll need to pay a transfer fee, usually up to 5% of the amount you’re transferring.  

If you get accepted for a 0% money transfer card, you won’t pay interest on the amount you transfer until the interest-free period ends. If you don’t clear the balance by the end of the 0% deal, you’ll be charged interest on what you owe.

Financial advice

If you’re struggling to pay off a loan, a debt adviser could help you work out a suitable budget and payment plan. They might even be able to negotiate with the lender on your behalf.

Can I refinance a personal loan if I have bad credit?

It may be possible to refinance a personal loan with bad credit, but you might have fewer lenders to choose from and you’re likely to be charged a higher rate of interest.

Bad credit loans typically have other restrictions, such as a limit on how much you can borrow and for how long.

If you can, try and improve your credit score before applying to refinance a personal loan. Read our guide to how to build a credit score for some reliable tips.