Refinancing a Personal Loan: What You Should Know

Refinancing a personal loan can be a great way to secure yourself a better deal. If the interest rates on offer are better than what you’re paying, you could be missing out on some serious savings. Or perhaps your current terms just aren’t working for you?

Whatever your reason, refinancing can be a smart move. But, there’s plenty to think about before you do. Canstar guides you through everything you should know about refinancing a personal loan.

In this article we cover:
What is refinancing?
Why refinance?
What to consider
Does refinancing impact your credit score?
How to refinance a personal loan

What is refinancing?

Refinancing is when you pay off a loan with another loan. This is usually done because the new loan has better terms than your existing loan. For example:

• You took out a loan of $5000 with an interest rate of 11%. So far, you have paid off $2000 leaving you with $3000 left to pay
• Another lender is now offering an interest rate of 7%, so you apply for a $3000 loan with the new lender
• You use that loan to pay off the remaining amount on your original loan
• You then continue making repayments on the new loan, only now you are paying 7% interest instead of 11%, saving you money

Why refinance?

Better interest rates

As mentioned in the example above, the main reason for refinancing a personal loan is to secure better terms. Interest repayments cost money, so the lower the better. And if you can refinance your loan at a lower rate, you could save a considerable sum.

• How do you get better interest rates?

You may be able to secure better interest rates because your credit score has improved and you can now secure better terms. A history of paying bills on time and meeting your loan repayments shows you are reliable. The better your credit score the more generous lenders are likely to be.

Another reason could simply be the market has shifted and interest rates are lower across the board. Banks and smaller lenders are constantly changing their interest rates.

The best way to secure better interest rates is to shop around and see if better rates are available.

→ Related article: Best Low Rate Personal Loans NZ

Searching for the Best Personal Loan?

If you’re looking for the best personal loan, Canstar’s personal loan comparison tables can help. The table below displays the sponsored unsecured personal loan products available on Canstar’s database for a three-year loan of $10,000 in Auckland, with links to lenders’ websites. Use Canstar’s personal loan comparison selector to view a wider range of products on Canstar’s database. Canstar may earn a fee for referrals.

Lower your repayments

If your loan’s interest rate isn’t an issue, it could be the loan term. If you are struggling to meet your repayment obligations, you could refinance the loan over a longer term. This will spread out the cost and reduce the regular repayments. For example:

• You have a loan of $3000 with an interest rate of 11% and two years remaining. To pay it off within those two years you have to make $140 monthly repayments.
• This is proving difficult so you decide to refinance for a longer term, giving you more time to pay off the loan
• Your new loan of $3000 has the same interest rate but is now over five years, not two. This brings down your repayments to just $65 per month.

Do note: while this will bring down your monthly repayments, you will paying interest over a longer period of time. So while your repayments will be more manageable, you’ll end up paying more over the lifespan of the loan.

You want to pay the loan off faster

On the other hand, if you have more money, you may want to pay off the loan faster. Many loans don’t allow extra payments, or will charge fees each time you want to pay off more. If you can afford higher monthly repayments, you may want to secure a loan with a shorter term.

You want to change your loan terms

Personal loans can be secured or unsecured, fixed or variable, and can come with other features such as balloon payments (see below), redraw facilities and more. You might want to refinance to take advantage of (or avoid) certain features.

For example, an unsecured loan won’t hold your possessions hostage, but will usually have a higher interest rate. Or you may want certainty over your repayments and choose to refinance your variable rate loan with a fixed rate loan. Or if a large balloon payment is fast approaching on your current loan, you may want to refinance in order to avoid it.

Quickfire terminology:

• Secured loan: loan is secured against an asset that can be repossessed if you fail to repay the loan
• Unsecured loan: no assets used as security. Because of this, it poses more risk for a lender so will usually come with a higher interest rate
• Fixed rate loan: your interest rate and repayment schedule is fixed and won’t change. Fees tend to apply if you break the fixed terms (extra repayment fees, break fees etc)
• Variable rate loan: interest rate isn’t fixed, and may go up or down. Will typically have more flexibility around payments, redraws, and fewer fees
• Balloon payment: your regular repayments don’t equate to the entire loan amount. So at the end of the loan term, you are left with a large, one-off (balloon) payment to make
• Redraw facility: some loans will require minimum repayments but allow you to make extra ones, too. If the loan has a redraw facility, it allows you to then take back any extra repayments made (you cannot redraw the minimum repayments)

Refinancing a personal loan: What to consider

While refinancing a personal loan might sound like a great idea, there is plenty to consider. Even if a better interest rate is on offer, refinancing may not be a better deal. Mainly because of the costs involved.

Getting a new loan can involve numerous establishment fees and costs, which can all add up. But not only that, paying off a loan early can come with numerous fees of its own. As mentioned above, many loans charge a fee for extra repayments, and when paying off the entirety of the remaining loan you could be hit with early exit fees, too.

Depending on how severe, these fees could end up offsetting any savings you make from a better interest rate.

Make sure you know all the costs involved. And check that after factoring them in, refinancing is still of financial benefit.

Does refinancing a personal loan impact your credit score?

Applying for any form of credit can impact your credit score. When you apply for a new loan, the lender will do a credit check (also known as a hard inquiry). This will cause a small, temporary dip in your credit score. This isn’t anything to worry about. Within reason…

Because every lender needs to run a credit check, and every time it causes a dip in your score, too many applications could have a negative impact. So shop around, but unless it really is a better deal, don’t apply.

And, if you have a loan rejected, don’t jump straight into applying for another one. Find out why your application was rejected and work on improving your credit score.

→Related article: How Long Does It Take to Fix a Poor Credit Score?

How to refinance a personal loan

Refinancing a personal loan isn’t much different to getting the original loan.

Check your credit reports and credit score

It’s important to be prepared. Take a look at your credit and see how your finances are looking. Has it improved? Are there any discrepancies or incorrect information that needs to be corrected? Is there anything that you might be questioned about? In New Zealand, there are several companies that make checking your credit score easy.

Shop around

This goes without saying. Whether refinancing your car, purchasing a new TV or even setting up wi-fi, shop around. The best way to find the best deal is to look at all your options. This includes talking to your existing lender. If you are looking at refinancing elsewhere, they may be willing to give you a better deal.

Read the fine print

Your current lender and/or new lender may have hidden costs, fees and limitations. This means you could be worse off even if the new loan looks better on paper. A lower interest rate isn’t the only thing to consider. Make sure you can pay off the existing loan in full, and you are clear on the costs that will be involved. Additionally, make sure you fully understand the costs and the terms of the new loan.

Compare personal loans with Canstar

Obviously, the best way to get the best loan is to shop around. Be sure to compare the interest rates being offered to you. Alongside fees, and payments terms. When refinancing, there can be a lot of them.

A great way to do this is to use Canstar’s free personal loan tool. It compares all the big banks and lenders across loan rates and fees in one easy-to-use tool. It also gives added information about Canstar’s expert research into the best loan providers and our prestigious Star Ratings and awards.

The table below displays some of the unsecured personal loan products available on Canstar’s database for a three-year loan of $10,000 in Auckland (some may have links to lenders’ websites). The products are sorted by Star Rating (highest to lowest) followed by company name (alphabetical). Use Canstar’s personal loan comparison selector to view a wider range of products on Canstar’s database. Canstar may earn a fee for referrals.

Compare Personal Loans

About the author of this page

This report was written by Canstar Content Producer, Andrew Broadley. Andrew is an experienced writer with a wide range of industry experience. Starting out, he cut his teeth working as a writer for print and online magazines, and he has worked in both journalism and editorial roles. His content has covered lifestyle and culture, marketing and, more recently, finance for Canstar.