No one can predict when an emergency would strike. Often, an emergency results in a lot of financial pressure on an individual’s cash flows. To get immediate cash during an emergency, people opt for a personal loan from banks, NBFCs, and digital lenders. 

But, the drawback with personal loans is that though they are helpful they come at high-interest rates as there is an urgent need for funds. Before one can realize it, the EMI’s turn into heavy expense outflows and the borrower may look for ways to lower the interest to further reduce EMIs.

Personal loan refinancing can come in handy in such situations. In this article, we will discuss when and how a personal loan refinancing can be used.

What is a personal loan refinance?

Let’s begin by understanding the meaning of personal loan refinance. It means, using a new loan to settle the existing personal loan. There could be varied reasons why one would refinance a personal loan. However, it is mainly used for getting better interest rates.

Some of the other reasons to use personal loan refinancing are:

  • Improved Credit Score – If an individual’s credit score has risen to a good level, from the time that the initial loan was taken, it can be a good reason to opt for refinancing.
  • Change Interest Rate Type – If there is a variable interest rate on an existing loan, the rates can go up or down each month, thus making it tough to plan finances. With a refinancing, one can switch between variable and fixed rates so that there is consistency in the monthly repayment schedule.
  • Balloon Payment – Often, during the end of the repayment period, a borrower is required to make a huge payment for the settlement of the loan. To avoid this, a borrower can refinance well in advance to a personal loan that doesn’t come with such stipulations.
  • Longer Repayment Tenure – For borrowers who are facing issues with finances, refinancing existing personal loans can be a good choice. They can opt for a longer repayment term to reduce the monthly payments and avoid stress-related to the payment of EMI’s.

How to refinance a personal loan?

Here are the steps to be followed for refinancing a personal loan:

  • Monetary Requirement – Refinancing a loan means paying off an existing loan with a new one to make use of better terms. Thus, it’s advisable to determine the amount of loan required to pay off the current loan. Also, it is important to check if there any prepayment penalties are associated with the existing loan.
  • Credit ScoreChecking of credit score before opting for the refinancing of a personal loan is a crucial step.
  • Lender Terms – Borrowers must shop around for rates and terms of personal loans across various lenders and choose the most favorable option. Lower personal loan interest rates and flexible terms make for an ideal option. Borrowers must also assess the savings on interest. A cost-benefit analysis is an ideal step at this stage.
  • Existing Lender – It also makes sense to get in touch with the current lender to check if they are willing to grant better terms on the existing loan. With existing lenders, there is always a chance that they may agree to flexible terms instead of losing out on an existing customer. Thus, they may offer better terms on the present loan.
  • Apply for Loan – After completing all of the above steps, one can fill all the required forms and furnish documents as required by lenders. If the terms set by the lender are acceptable, then one will receive a credit of the funds and the same can be used to pay off the existing loan.

What is a personal loan balance transfer?

A personal loan balance transfer is a process under which a customer transfers the balance from an existing personal loan from one lender to another. This is done when the new lender is offering better interest rates which help in reducing overall debt. 

A personal loan balance transfer calculator is often used to determine the cost of transferring the balance of a personal loan from one lender to another.

It is important to carefully assess the personal loan balance transfer deal and choose an ideal option to save on the total interest expense on the loan. There could be some charges to be paid and these have to be understood by the borrower before agreeing to a transfer.


Personal loan refinance is a safer option during the early years of a loan since it’s during this time that the interest portion is highest. As the loan tenure progresses, the interest portion keeps reducing over the years. Balance transfer offers the same benefit at a lower interest rate. An applicant should do a detailed cost-benefit analysis of both before finalizing one.


  1. When should I refinance my personal loan?

Here are some of the stages when you can consider refinancing a personal loan:

  • When you have a better credit score.
  • While switching your rate type. 
  • To avoid a balloon payment. 
  • Reduction in income necessitating lower monthly payments.
  • Need for faster loan repayment.
  • Fees are affordable.
  1. If you refinance, does your loan start over?

Loan refinancing means that you're replacing your old loan with a brand new one. This effectively means that you start the loan over. 

  1. Is it better to refinance or get a fresh personal loan?

Depending on your requirement and stage of an existing loan, you can choose to either refinance or go for a fresh personal loan. Refinancing has many benefits including better interest rates. If a new personal loan offers better terms, you can go for it after reading through all the terms and conditions.

  1. Does refinancing a personal loan affect your credit?

Refinancing personal loans could result in a small fall in your credit scores due to the hard inquiries that get registered through the applications. This is also because a new credit account gets opened with refinancing. However, as long as you stick to the repayment schedule, the scores may recover soon.

  1. When should you not refinance?

If you are lacking in credit score it is best to avoid refinancing till the score recovers to an acceptable level. Also, if long-term costs are more than the overall savings then you should avoid refinancing.