Your guide to refinancing a personal loan
Refinance. Three syllables that can take you from woe to go, and streamline your current loans or debts.
A refinanced personal loan is when you take out a loan with better rates, fees and charges in order to pay off another loan (or loans).
You can consolidate numerous loans into the one place with a refinanced personal loan. You can choose to do so with your current provider or enter in a new agreement with a new one.
Why refinance?
Two words. Better terms. Life changes, debts accumulate and interest rates fluctuate.
A loan with a lower interest rate than what you are currently on, makes sense. You’ll lower your repayment amounts and may even change your repayment terms. If you have multiple debts you can pay them off and just use the one refinance personal loan for simple, single, monthly repayments.
Convenience is key. But value is king. You shouldn’t refinance your personal loan unless you are going to be paying less for your overall loan. So be sure you are across what your current total loan repayments are, and your exposure to fees and higher interest. Then you’ll be in a position to decide if refinancing now is the right decision for you.
How to refinance
Making the first steps into refinancing your personal loan is a little the same as starting to apply for a personal loan all over again. There are key questions you need to answer:
| Loan Amount | How much do you need? While it’s tempting to ask for more than you really need, it’s better to limit yourself to the essentials - and the loan amount you’re refinancing. |
| Repayments | How much can you afford? It’s time for an update - can you afford more, or less than your current monthly repayment? Look at your everyday budget to see how much you can afford to put towards repayments each month. Be sure to give yourself a buffer, because life happens (and missing your payments can cost you a lot). And if you think your expenses might change in the next few years (say, if you want to buy a house or a baby might be on the cards), remember to factor those in too. Future you will thank you. |
| Loan Term | How long will you need to repay? Simply divide the loan amount by your monthly repayment to get a ballpark amount of the time it will take to repay the loan. |
| Loan Type | Decide between secured or unsecured? If you’re willing to put an asset like a car or a property up as security against the loan, you can consider a secured loan. This will get you a better rate, however, the lender has the right to repossess the asset if you can’t repay the debt. So just make sure you’re confident in your ability to repay the loan. The purpose of your loan will also need to be eligible. |
Calculate your repayments
Apples or oranges?
Now that you roughly know what you’re after, you can start looking around at different refinance options and look at personal loans that tick your boxes – comparing apples with apples, oranges with oranges.
Our Personal Loan Comparison calculator allows you to compare repayments against other lenders across a wide range of secured car loans from $10,000 to $100,000, to choose the loan that’s right for you.
When to refinance
When interest rates drop you may want to reconsider your debt situation and reduce outstanding amounts with a refinanced loan.
When life is hectic and busy and it’s easier to make one monthly payment rather than five different ones that you don’t keep track of.
When your credit score improves due to diligently paying off your debts, then you may find out you’ve qualified for a lower rate.
Again, do your research, personal loan refinancing is more than just a lower interest rate, it’s also about fees and charges and exit penalty rates. Best to calculate how much it’s going to cost you to exit the loan you’re in and enter a new one before you decide.
Compare compare
Before applying to a lender, always compare provider fees, admin charges and interest rates. A good comparison site will break these down for you. Try our Plenti comparison guide or Canstar also offers comprehensive comparisons.
Calculate the costs so you know if refinancing is worth it. The important elements to compare on all personal loans are comparison rates, interest rates, application fee and loan term. Also enquire about exit fees should you wish to pay out your loan early and default and missed payment fees. The comparison rate will show one figure that encompasses the entire cost of the loan you are researching.
What to consider
When choosing a new refinanced personal loan you may want to consider secured personal loans versus unsecured personal loans. You’ll need assets for a secured personal loan, and they’ll need to be worth more than the debts you’re consolidating. The risk is losing those assets if you default, however if you make your payments on time then the reward is lower interest rates for secured loans.
Also have a think about fixed versus variable rates. Fixed rate personal loans remain at the quoted rate for the full term so you know what amount you are paying every repayment time. Variable rate personal loans traditionally have fewer restrictions and you can make extra payments to pay off your loan early. However, rates and therefore payment amounts can fluctuate, fine if it goes down, costly if it goes up.
Many online money lenders can provide lower rates than the big banks. If you like to physically go into a traditional bank, then they are not for you.
Do look out for longer repayment terms, though. While interest rates may be lower, over time the outlay may end up being more.
Who provides refinance personal loans?
Credit Unions, traditional banks, neobanks and online money lenders can all provide you with a refinanced personal loan. Many online only banks can offer an interest rate that has been personalized for you based on your credit rating and/or financial history.
If you’ve already got multiple loans with the one institution then it will be easy to consolidate into one. If you have just one personal loan and want to refinance it with another from the same bank, then it’s easier to negotiate a more favourable rate than to go through the entire process of refinancing.
What about my credit score?
This is a chicken or egg style question. Refinancing may improve your credit score, or it may impact it in other less favourable ways.
When you consolidate your credit cards and personal loans into one refinanced loan then your score will improve as you have less open accounts. Then, if you just make your repayments on time, every time, your score will improve again.
The good news is you can check your credit score for free via a registered agency such as Equifax, CheckYourCredit and Experian.
Be warned, though, the more new personal loans you apply for, the more it will hurt your score. Do your research, apply only for the one that works for you and then your score won’t be impacted.
Requesting a personal RateEstimate with Plenti won’t impact your score as it is considered a soft credit check in order to offer a rate specific to you. If you then apply for a loan, we submit a credit inquiry from Equifax and/or Illion and that enquiry may affect your credit score.
Your credit rating will also benefit should you choose to consolidate all your debts into one personal loan. Either way, ensuring you meet your regular payments, even topping up payments, will help keep your credit score viable when you want to borrow more.
What do I need to apply
A refinanced personal loan is still a new loan, even if you’re paying off an old. You’ll need to provide all the criteria for the loan application including identity documentation (licence, passport, Medicare card etc). Add bank statements, employment history, credit card statements, lease or proof of property ownership and more.
If you’re self-employed you’ll need the last two years of your business and personal tax returns (so have your accountant on speed dial). You’ll also have to show profit and loss statements, bank statements, credit card statements, your lease if you rent, an ATO Notice of Assessment for two years, ABN and the like.
If you’re choosing a secured personal loan to consolidate then you’ll also need valuation certification of your assets.
Yes, looking into personal loan refinancing is a little more work, however with significant savings on offer, well worth your time, even if it’s just to feel reassured you’re already paying a fair interest rate.