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Refinancing A Personal Loan: How Does It Work?

Refinancing a personal loan might sound like an intimidating process, but at the Credit Union of Southern California (CU SoCal), we’re determined to make it as easy as possible.

If you’re considering personal loan refinance options, you’ll find all the information you need in this article. Whether you’re looking to lower your monthly payment, get a lower interest rate, or reduce your loan term, refinancing could be the best option for you.

If you’re wondering how to refinance a personal loan, give CU SoCal a call today at 866.287.6225  to schedule a no-obligation consultation to see what refinancing may look like for you.

Get Started on Your Personal Loan!

What Is A Personal Loan?

With so many different types of loans and financing options available, you may be wondering which is best suited for your needs.

One of the most popular types of loans is the personal loan, and unlike a secured loan that is guaranteed with collateral, like a home or vehicle, a personal loan is typically unsecured.

Personal loans are provided based on the applicant's creditworthiness, so having a good credit score can help you obtain the best terms and interest rates.

Personal loans can be used for many different purposes, like paying off a medical bill, funding a wedding, or starting a business. They’re a great option for financing big purchases or helping you meet your financial goal, but it’s wise to make sure you’ve done your research before signing the dotted line.

A personal loan, like any other kind of debt, needs to paid back, and if you can’t afford your monthly payments or fail to make your monthly payment on time, you run the risk of harming your credit score and falling further behind with your financial goals.

How Does Refinancing A Personal Loan Work?

In some cases, the borrower of a personal loan may find it difficult to make their monthly payments—usually because the interest rate is too high.

If this sounds familiar, you might have some questions like, “can you refinance a personal loan?” and “is it good to refinance a personal loan?” In this section, we’ll explain everything you need to know about refinancing and how it works.

Pre-qualify For A New Personal Loan

The first thing you’ll need to do is pre-qualify for a new loan. Pre-qualification is similar to preapproval in that you’ll need to provide your lender with important financial information such as your total debt, assets, and income.

The primary difference is that preapproval requires an official credit check while pre-qualification does not. Because the information provided is simply based on an estimate of your financial situation, the amount you pre-qualify for isn’t set in stone.

Calculate Your Costs

Once you have a good idea of how much you are pre-qualified for, you can start calculating your costs. To do this, you’ll need to consider your current existing loan balance, the new loan’s interest rates, and any associated fees. This will give you an idea of whether refinancing is the best option now and whether it will save you money in the long run.

Use The New Loan To Pay Off Your Current Loan

Once you have your new loan, you’ll need to use it wisely to pay off your current loan. Lenders generally transfer the loan amount to your bank account; they don’t pay off your loan for you. So while you now have extra cash around, don’t forget the purpose is to pay off your current loan.

Verify Old Loan Is Closed

Once you’ve paid off the loan, double-check with the lender or your online account to ensure that the loan is officially closed. Leaving even a small balance behind could lead to extra fees. Once you have the OK from the original lender, you can begin paying off the new loan.

When Refinancing Makes Sense

Refinancing a personal loan may seem like a quick fix, but it isn’t always the best idea. You’ll have to consider changes in your financial situation and the reason for the loan to see if it makes sense to refinance your personal loan. Below are a few instances that make refinancing a good idea.

Your Credit Score Has Improved

If you received a personal loan when your credit score was low, it probably came with a high interest rate. But if you’ve consistently been making payments on time and managed your other debt, there’s a good chance your credit score has improved.

Refinancing with better credit means getting a better interest rate, which will save you money.

If you’re not quite there yet, have a look at our tips for how to improve your credit score to get ready for refinancing. And if you need some extra help, check out the CU SoCal Credit Builder Loan—a loan specifically designed to help you improve your credit score.

You Want Lower Monthly Payments

If you’re struggling to meet your current monthly loan payments, refinancing with a loan that has a longer term will mean your monthly payments will likely drop. Be careful, though – you’ll be paying more in interest over the longer term, so this is only a good option if you need more cash each month for other expenditures.

You Want A Shorter Loan Term

You can also refinance for the opposite reason – to have a shorter loan term. Refinancing this way will mean your monthly payments may go up, but you won’t pay out as much to interest.

You Want A Fixed Rate

Some personal loans come with a variable rate, which means that how much you pay, both in installments and interest, may increase as time goes on and market conditions change. Refinancing could be a good option if you want to switch to a fixed-rate loan and have a consistent payment each month.

You Want To Avoid A Balloon Payment

A balloon payment is a large payment at the end of your loan term that the lender might require. It will be much larger than your regular monthly installment and could come as a financial surprise when you think you’re finished paying off your loan. Refinancing a personal loan could help you avoid this payment by helping you pay off the remainder of the loan all at once with the new loan.

You Can Afford The Fees

There are usually fees associated with any type of loan, from application to origination fees. If you decide to refinance your current loan, make sure you can afford all the fees associated with your new desired personal loan. CU SoCal does not charge fees on personal loans.

Things To Consider

If refinancing your personal loan makes sense for your situation based on the above factors, you’ll want to have a look at some other considerations and consequences of refinancing. Ensuring you know how refinancing will affect your rates, fees, and credit score will help you make the best choice. Here are a few things to consider.

Credit Score Impact

Refinancing often comes with one big question: Does refinancing a personal loan hurt your credit score? To get approved for refinancing, your lender will perform a credit check to make sure you’re a reliable borrower. Credit checks might lower your score, as will creating new loan accounts. If you keep meeting all of your monthly payments for the loan duration, however, your credit score will go up. Need some help with improving that score? Have a look at our advice on how to improve your credit score.

If you’re also wondering how often can you refinance a personal loan, there aren’t necessarily any limits other than how much of a hit your credit score can take in the short term. Making sure you know how your score is impacted by refinancing will help you make the best choice for how often you do it.

Long-Term Interest

Suppose you’re choosing to refinance your personal loan because you need lower monthly payments. In that case, you’ll likely see more interest costs through the duration of the loan. Refinancing won’t save you money this way, but it will make monthly payments more manageable.

Origination Fees

An origination fee is a charge that you must pay upfront when you sign for your personal loan. The fee is meant to cover the cost of processing your loan and can be anywhere from .50% to 6%, though some are even higher. Make sure you can afford these fees before proceeding with refinancing.

Prepayment Penalties

It might sound like a great idea to pay off your loan early, but keep in mind that many lenders charge prepayment penalties if you pay off the entire balance before the original loan term ends. If you refinance with a new personal loan, your original loan terms could see you paying a hefty fee for paying it off early. Check with your lender to see if these penalties apply to your situation.                          

Where To Apply For Refinancing

As you probably saw when you applied for your original loan, there are several different to borrow from. Many of these lenders will also offer refinancing to Members. In fact, you might be able to refinance with your original lender, which will save you the hassle of moving to a different lender and creating new accounts. Below are the best places to look for personal loan refinancing.


Banks are generally the preferred lender for most loan-seekers. Most people will already have a bank account, so getting a loan or refinancing one with their current bank makes a lot of sense. It’s very convenient, and they will have access to your information. Additionally, online banking is ubiquitous, so you can be sure that apps and websites will be functional and easy to use.

However, many banks have incredibly high standards for whom they will allow to take out a loan. Your credit score should be pretty high, or you run the risk of your loan application being denied.

Credit Unions

Credit unions are an outstanding choice for borrowing and refinancing. These institutions are usually more local and much smaller, which means you’ll get more personalized attention and better Member service than you might at a large national bank. You’ll be able to talk with specialists to ask questions and get information without being rushed out the door so they can serve the next in line. This way, you’ll be able to get the best term and rates for your refinancing.

Because credit unions are so small, though, it’s not incredibly common for them to have excellent online services. However, at CU SoCal, we pride ourselves on offering the best online tools for our Members. Also, we don’t charge fees on personal loans!

Our online banking system and mobile app feature great security and usability, which makes taking advantage of great financial products easier than ever before.  

Online Lenders

Online lenders are becoming a popular choice for loans as more and more people rely on the internet to get things done. Because all of their rates and details are online, it’s easy to compare different lenders and choose the right one.

On the other hand, it can be challenging to talk to a human being if you’re having issues, so this may not be the best option for individuals who prefer face-to-face interactions.

CU SoCal Personal Loans

At CU SoCal, we know that a little extra cash can go a long way, and a personal loan can help you get there. With financing from $500 to $30,000 and competitive rates, our loans are suitable for just about anybody.

We never ask for an application fee, and we don’t charge a prepayment penalty, so you can rest assured that you aren’t spending more than you have to on your personal loan.

Apply For A CU SoCal Personal Loan Today!

If you’re ready to get started with a personal loan or refinancing the one you’ve got, CU SoCal can help.

Give us a call today at 866.287.6225 to schedule a no-obligation consultation!

Get Started on Your Personal Loan!

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Credit Union of Southern California (CU SoCal) is a leading financial institution empowering those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County to reach their goals and build strong financial futures. CU SoCal provides access to convenient money management services and offers competitive rates and flexible terms on auto loans, mortgages, and VISA credit cards—turning wishing and waiting into achieving and doing.


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