Refinancing a personal loan: could it save you money?

Finance Writer · 22 June 2021
Are you paying more for your personal loan than you need to?

It may be worth checking out how your current loan compares to other options on the market to make sure you’re still getting the best deal. Refinancing your personal loan to a lower rate could mean you pay off an old loan or debt faster and/or pay less interest and fees overall.

In this guide, we cover:

What is personal loan refinancing?

When you refinance a personal loan, you take out a new loan to pay off an existing loan or debts. It’s beneficial if you can find a new loan with better terms, fees and interest rates as it can lower your monthly repayments and the total amount payable over the life of the loan. However, it’s important to also factor in any application or switching fees that may apply when weighing up your options.

Why should I refinance my personal loan?

There are a few reasons why you might choose to refinance your personal loan, such as:

  • you want to consolidate multiple debts into a single, manageable monthly payment
  • you found another loan with better terms and lower interest and fees, meaning you would pay less in the short and long term
  • your credit rating has improved, allowing you to access better terms and interest rates and/or more money.

How to compare personal loans to find a better deal

There are a few things you should generally consider when comparing loans, to make sure you have the full picture. Pay attention to:


If you’re not careful, your new loan could end up costing more because of fees. Some important ones to look out for are application fees, service or ongoing account fees, and whether there’s an exit or ‘break cost’ fee attached to your old loan. It could also be worth checking out whether you would be charged fees if you choose to make extra repayments.

Additionally, if you’re considering a short-term personal loan, or payday loan, keep in mind that there are many risks and potentially very high fees involved with this type of loan.

Interest rates: fixed or variable?

The exact interest rate a lender charges typically depends on the borrower’s personal circumstances, including their credit score. If you’re comparing interest rates and weighing up a new loan with a cheaper rate, you’ll need to calculate more than how much lower the new rate is and what that equates to week to week or month to month. You’ll also need to consider whether a fixed or variable interest rate is best for your needs.

Fixed rate: With a fixed rate, your repayments will remain the same throughout the loan term, making it easier to budget. The downside to fixed rates is they tend to have less flexible repayment terms and features (like redraw facilities). If you’re planning to pay your loan off early, a fixed rate loan may require a break cost or break fee.

Variable rate: Variable interest rate personal loans may offer favourable extra features, such as free redraws, free extra payments to pay off the loan early, and flexible repayment frequency. However, as the interest rate can go up and down with the market, you may want to factor in a potential future rate change of around 2% to make sure your budget can cope with any increases.

Another way to help you work out the true cost of your potential new personal loan is to check the comparison rate, too. This combines the interest rate with the fees you’ll incur, providing a more accurate measure of the overall cost.

Conditions and features

Personal loans vary in their flexibility, so look at the conditions and features to make sure they meet your needs and circumstances.

Check if you can:

  • make additional repayments (including whether a fee applies for doing this)
  • access redraws
  • choose from weekly, fortnightly or monthly repayment cycles to suit your income and lifestyle.

Secured or unsecured?

A secured loan is where you put up an asset, such as your car or house, as security in the event you’re unable to make your repayments. Secured loans tend to have lower interest rates because of this financial protection. However, if you default on a secured personal loan, the lender would be able to sell your secured asset to help recover its costs. On the other hand, an unsecured loan doesn’t require any assets to protect the lender. Instead, more emphasis is placed on the health of your finances, including your credit score. As a result, the interest rates are often higher.

Loan term

Consider an appropriate and realistic timeframe to pay off your new loan. Perhaps you’re looking for a longer loan period to help bring down your monthly repayments. Just be mindful that while longer terms may have lower repayments and in some cases more appealing interest rates, they could also cost you more in interest and fees in the long run.

Is refinancing a personal loan worth it to save money?

The end game for most people comparing personal loans is saving money, so it’s important to make sure refinancing is worth the effort. While a better deal may look promising on paper, do your calculations before making a switch.

Tally your current total monthly repayments for existing loans and debt, including fees and other charges. Compare this amount with your new consolidated loan amount, including any exit and new account establishment fees, and also compare the total cost of both loans over their respective terms. If the new loan is more expensive than your existing debts, then you could end up accumulating more debt over the life of the loan.

Need help?

To make it easier for you to crunch the numbers, check out our loan comparison calculator. It can help show you how your new loan interest and fees stack up against your existing loan. It could also be worth seeking professional financial advice, to help you reach a decision.

Will refinancing a personal loan hurt my credit score?

Refinancing a personal loan can affect your credit score. This will depend on your personal circumstances and whether you meet the criteria for the new loan you apply for.

As is the case with all forms of credit, if you make multiple applications in a short period of time, or you apply for a new loan you don’t qualify for, then this can harm your credit score.

However, if your new loan is to help consolidate multiple debts, your score could improve, as you’ll have fewer open loan accounts. Additionally, lower repayments could put more money in your pocket to invest in savings and build other good money management habits.

How do I refinance my personal loan?

If you decide that refinancing a personal loan is the right option for your situation, here’s how it typically works:

  1. Compare personal loan options and choose your lender, based on professional advice if you need it. Make sure that the new loan can be used for debt consolidation and refinancing.
  2. Apply for the new personal loan. Just as you would have done the first time, make sure you meet the criteria for the loan before submitting an application. You may be able to note here that your loan purpose is to refinance or consolidate debts.
  3. Once you receive the funds, pay off your current loan. Note that some debt consolidation lenders may offer to arrange this for you, although it’s worth confirming whether they charge a fee for this service.
  4. Close the old loan account. Get in touch with your previous lender and arrange the account’s closure. Confirm there’s no outstanding balance to be safe.
  5. Cancel any automatic payments or direct debits to the old loan, and set up the new repayments if you want to make sure you don’t accidentally miss any.

All things going to plan, refinancing your personal loan could put more money back in your pocket to invest into savings and other healthy money habits.

When determining the value of refinancing, do your research and consider all options available to you. If you are finding it difficult to manage your current loan repayments or debts, you can seek advice from a financial counsellor. Financial counsellors offer free, independent and confidential advice. You can speak to one through the National Debt Helpline on 1800 007 007.

Cover image source: Worawee Meepian/

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