Does Refinancing a Personal Loan Hurt Your Credit?

You must be aware that you can refinance any kind of loan, starting from a personal loan to a home or auto loan. 

If you were searching for ‘refinance loan’ or ‘what is refinancing’, this article will take a look at what it is all about.

What is Refinancing a Loan?

Refinancing a loan means taking out another loan to repay one or more outstanding loans. 

This is a good option for getting a better deal. In most cases personal loans are taken in emergency situations, and you wouldn’t have been able to research adequately to find the best lender. 

The option of refinancing your loan from the same or a different lender can you in such situations.This gives you a chance to negotiate for a longer tenure, or a lower interest rate! 

How Does Refinancing a Loan Work?

Normally when you think of refinancing a loan, you think of a bigger loan like a home loan or a car loan. But have you taken a personal loan and wonder how does refinancing a loan work? 

In this process, as a borrower, you take out a new loan in order to pay off the previous loan or loans. Then the terms of the previous loan are replaced by an updated new agreement. The main goal is to get more flexible payment structures. 

In most cases, people choose to refinance their loans because of the interest-rate environment. Other reasons may be -

Benefits of Refinancing Your Personal Loan

Take a look at the following benefits of a refinance loan - 

Opportunity to Lower Your Monthly EMI and Interest Rate

If you are having trouble paying the existing EMIs and would like a lower amount, you can achieve that via refinancing your loan. You can opt for a more affordable interest rate as well as EMI while doing so. 

This way you will be able to manage your finances better and not get overwhelmed by your loan.

Change Your Type of Interest Rate 

You can choose to change your interest rate type from a floating to a fixed one or vice versa. A fixed interest rate will give you predictability, while if you are aware of the market trends, you can choose a floating interest rate and save some money.

You can Save Money on the Total Interest Paid

If you choose to shift to a shorter repayment tenure, you will end up paying more EMI each month. But this will also result in you saving some extra cash in the long run, as you will pay less money as interest. 

Things to Consider Before Refinancing Your Loan

Just like there are advantages of refinancing your loan, there are some disadvantages as well. Here are some things you should consider before you opt for refinancing your loan - 

How Much Do You Actually Save?

If your refinanced loan term is identical to the previous one, the total interest you pay might end up outweighing what you save because of a lower interest rate. You might have to pay a prepayment penalty on foreclosing your original loan. That amount may negate the money you save by refinancing. 

The Changes in the Market

If the market interest rates end up dropping, and you have a fixed rate of interest, you won’t get any benefits. So consider the changes in the market before deciding the new terms of your refinanced loan.

Interest vs Timeline

This is a very basic calculation. If you refinance your original loan for a longer term, you will get some relaxation as you will have to pay lower EMIs. But at the same time you will end up paying a bigger sum in the form of interest.

Similarly, if you opt for a shorter tenure, you will be burdened with higher EMIs every month. Also consider the closing costs you might have to pay for the refinancing. 

Impact on Your Credit Score

Consider that your credit score may go down, as the new lender will run a hard credit inquiry if you choose to move forward with a new refinance loan.

Time Taken to Refinance

The time taken to refinance a loan may be around 4-6 weeks and sometimes may be counterproductive to your plan of saving some bucks. You will have to keep paying the loan at the precious rate till the refinancing has successfully happened.

A refinance loan is technically a new loan, which means that the lender will closely verify your current credit report. This close verification is often known as a ‘hard credit pull.’ It is done to know your worth as a prospective applicant.

A new credit also brings uncertainty if you will be able to pay off the debt successfully. All of this may lead your credit score to dip slightly, but the change will be temporary. 

With regular payments and good credit behavior, you will be able to bring your credit score back on track, or even higher. 

Multiple credit queries from various lenders into your credit report may portray you as a credit-hungry person, further reducing your credit rating. So it's better to time your refinance correctly and not create a coincident issue with your prospective car loan or house loan.

However, such credit inquiries have a 'short-term' effect on your credit report, and timely repayment of your new (refinanced) loan will improve your credit score over time to where it belonged and even better.

Learning alone the good reasons behind refinancing doesn't minimise your chances of pitfall, and you must know the other side too to better judge your need for refinancing.

An extended tenor with the refinanced loan may lessen my monthly burden of payment instalment, but it definitely amounts to payment of more interest in the long run. It may be construed as postponement of liability and nothing else, though it works in your help keeping you solvent on a monthly basis.

Refinancing and shopping for that will entail hard pull credit queries on behalf of the lenders, which can bring down your credit score detrimentally, although for a short term. Timing of such shopping along with solicitation of other major loans may further hamper this.

Washing your hands off the existing loan does call for some penalties, which might be termed as 'prepayment fees' imposed by your current lender. This is because refinancing actually means paying off your current loan first and starting the new one next. On the other hand, the new lender might charge 'application fee' and 'origination fees.' All these, taken together, must not add to your financial woes. 

After all the research, comparison, and sending applications, it takes time to zero on a particular lender for refinancing. If your existing loan is on the verge of being paid off, efforts on refinancing may not be worthwhile. 

Refinancing is the best option in the beginning years of your loan as the interest burden is at its peak during this time. Hence switching loans at this very time sees you as a clear winner.

Refinancing an existing loan is synonymous with paying a number of fees. Your current lender may charge a 'prepayment fee' when the loan gets closed earlier than its contractual repayment period.

Refinancing a home loan, for example, attracts fees charged toward home appraisal and credit reports.

Over and above that, the new lender may charge you with 'application fees' or ‘origination fees.' The summation of all such fees must not outweigh the benefit of refinancing, which will become 'unprofitable’ in that case. So do your maths before jumping at refinancing a loan.


Refinancing a loan is a big decision that can either work in your favor or make you lose money. If the interest environment around you has changed, there is no harm in looking to refinance your loan. People commonly refinance their home loans, student loans, and even personal loans with great ease.

But it is essential to remember that refinancing is not a small decision. Make sure you calculate all the fees associated with the process including foreclosure charges, the new and old tenures, etc. before making a decision. 

The more thoughtful your calculations, the higher will be your chances of making a good refinancing decision and saving money!

Does Refinancing a Personal Loan Hurt Your Credit - Related FAQs

The act of procuring funds for a purpose is known as financing. Whereas the term refinance refers to taking another loan to repay an old one, or to renew the term of an existing loan from the same vendor.

Since refinancing a loan practically refers to taking out a new loan, it will make your credit score dip slightly. But let that not deter you, as the process will be temporary. With regular payments, your credit score will surely bounce back.

If the interest environment has changed, as banks are giving lower interest rates, it is a great idea to refinance your loan. But the success of the idea depends on your individual case, including how much of your loan is left, how long a tenure you want, etc.

A cash out refinance is common in case of a secured loan (mostly home loans). It is done when the collateral has increased in value over the tears. In this case, the borrower withdraws the value or equity in the asset in exchange for a higher loan amount. 

You will save money by refinancing your loan, if you consider all the factors related to your loan. Some of the factors are - 

  1. Loan amount left
  2. Old and new rate of interest and tenure
  3. Foreclosure charges for previous loan
  4. Type of interest and market conditions
  5. Time taken to refinance

Most lenders who provide consumer loans also provide refinancing loans as well. You need to follow these steps to refinance your loan - 

  1. Calculate your requirements
  2. Discuss with your current lender
  3. Choose a new lender after through research
  4. Check your credit score
  5. Finally, apply for a refinance loan.


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