Personal Loan

What is the Good Time and When to Refinance a Personal Loan


Personal loans are loans taken by borrowers to meet personal expenses such as those of marriage, home renovation, vacation, etc. Refinancing a personal loan means revising the terms of repayment of an existing personal loan. It allows changes in the existing loan agreement related to interest rates, term of loan, repayment schedule, etc. A borrower with a good payment history can opt for refinancing. The borrowers can reduce their debt payment obligation or extend the loan term by refinancing the loan.

Reasons for loan refinancing

The borrowers choose to refinance a personal loan for the following reasons:

  • Reduce the burden of monthly loan installments: a decrease in monthly income, inflation, medical emergency, and other situations can make it difficult for the borrower to pay the high monthly instalments regularly. In such a case, the term of the loan can be extended to lower the monthly payments of the loan.
  • Save interest cost: borrowers can shorten the loan period through loan refinancing. Repaying a loan in a shorter time can help in saving the interest cost.
  • No major impact on credit score: this process does not have a major impact on credit score. Borrowers can avail themselves of the advantages of refinancing without hurting their credit rating.

What is a good time to refinance a personal loan?

Refinancing at the right time can give maximum benefits. The decision as to when to refinance a loan can differ from person to person.

  1. When there is a more favourable lending environment: the borrowers can consider this option when the interest rates in the market are less than the personal loan interest.
  2. Strong credit history: not all borrowers can approach loan refinancing. Lenders only allow refinancing when the borrowers have a good repayment history and credit score. With a good credit score, borrowers can get a better scope for negotiation of new terms of the loan.
  3. During the first half of the loan term: the initial loan instalments majorly comprise the interest amount. A personal loan can be refinanced at any time, but for maximum interest savings, it is better to seek refinancing during the first half of the loan term.
  4. Increase in income of the borrower: If the borrower’s income increases, it may be time to consider loan refinancing. Repaying a loan in a short time can improve the credit score and save on interest costs.
  5. When there is a requirement to extend the loan period: Borrowers can ask the lenders for refinancing of a personal loan if they want to reduce the monthly instalment amount. An increase in prices, a decrease in earnings, and emergency expenses may leave the borrower overburdened with expenses. In such a case, the borrowers can reduce the monthly loan interest payment by extending the loan period. A longer loan repayment period offers smaller loan installments.

How to refinance a personal loan?

  1. Choose the right time to refinance: refinancing at the right time can save maximum interest expense. Borrowers can check their eligibility for a loan refinancing option. A borrower with a poor credit score or an irregular payment history is not allowed to refinance a personal loan.
  2. Negotiate with the lenders: Borrowers can ask for loan refinancing from the existing lender or a new lender. Different lenders charge different fees for this process. It is important to consider the refinancing fees and calculate the net benefit to decide whether to proceed with it.
  3. Consider the part pre-payment charges of a personal loan: Pre-payment of a loan means repaying in full or a part of the loan before the end of the loan term. Lenders charge a fee from the borrower for the early settlement of the loan. These charges should not exceed the savings in interest; otherwise, the refinancing will result in a loss.
  4. Apply for refinancing with documents: The borrowers can apply for refinancing to their most preferred lender. Lenders do not have to do a detailed examination of the borrower as it is just like a renewal of an old loan agreement. Still, the borrowers might have to submit a few documents as per the lender’s policy.
  5. Start repaying as per the new terms: After the approval of refinance loan application, the borrowers can start to repay the existing loan according to the new terms. In case of pre-payment of the loan, the borrowers have to repay the balance loan amount as per the new loan agreement entered into with the lender after refinancing.

Debt consolidation versus loan refinancing

These are two different terms.

Debt consolidation means combining two or more loans into a single new loan. Borrowers with multiple loans can seek loan consolidation of loans to easily manage repayment obligations easily and avoid high-interest payments.

Whereas refinancing a loan means revising the terms and conditions of an existing loan. Borrowers opt to refinance a personal loan to take advantage of lower interest rates and favourable lending options.

Points to consider before refinancing a personal loan

  • The cost of refinancing a loan, such as processing fees, loan closure charges, etc., shall not exceed the benefits of refinancing. If expenses exceed the savings in interest, this option cannot be favourable.
  • Borrowers should try to repay the loan in installments regularly. Regularity in repayment reflects on your credit score. A good credit score is necessary to get your loan refinancing application approved by the lender.
  • To avail of the maximum benefits of loan refinancing, the decision to get your loan refinanced shall be taken during the first half of the loan tenure.


Regular and constant repayment helps in maintaining a good credit score. Lenders are more likely to accept the refinancing application of borrowers with a good credit score. A good credit score can also enhance the negotiating power of the borrowers. It is better to compare the rates and charges of different lenders and select the right time to refinance a personal loan for maximum benefits.

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