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Refinancing a personal loan

Written by

Shaun McGowan

Ok, so you’ve got a personal loan and want to either reduce the payments or find yourself a better interest rate.

We’ve all seen interest rates come down a lot over the last couple of years.

Are you overpaying?

Let’s walk through the good and the bad of refinancing and how you could potentially get yourself a better deal.

First, some basics.

How refinancing your loan actually works

The actual process of refinancing your loan goes like this:

  • You apply for a new loan with a new lender
  • Your new lender either releases the money for you to repay your loan or repays your existing lender directly
  • Your existing loan is repaid, and you make repayments on your new loan as you did previously

It’s a little like debt consolidation, but with only a single loan to work with.

Essentially, you get a new loan to repay the old loan, and repay your new loan (saving money in the process).

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It seems so easy, why isn’t everyone refinancing?

Most people don’t refinance their loan due to either contractual restrictions (e.g. break fees) or a lack of decent, usable information for consumers.

  • You can only refinance a loan after 12 months on an existing loan contract
  • Some loans may have fees if you repay and exit the loan early
  • Finding a range of offers to compare can be time-consuming and confusing
  • Most borrowers aren’t able to get personalised quotes from lenders without applying

While we can’t help with the first two, we can help with the personalised comparison part (and help you avoid falling into any future traps!).

Australia's Money Matchmaker matching you with your best loans across multiple lenders
Money Tip: Our matchmaking engine is a smarter way to find personalised offers from lenders, which means you can focus entirely on the loan features most important to you and compare loan offers, features, and repayments from Australian lenders in just a few minutes.

A common (and avoidable!) refinancing scenario

Refinancing means you can renegotiate a better loan contract, but instead of only dealing with your existing lender, you’re sorting through the best offers from all available lenders on offer.

Here’s a common refinancing scenario:

  • Two years ago you borrowed $20,000
  • You wanted to lower repayments so chose a seven-year term.
  • You notice the majority of this goes toward repaying interest charges.
  • Now you want to repay your loan early, but notice there are extra repayment penalties if you do.
  • You look online and see personal loan offers but don’t know what rate you can get without applying.

This is a frustrating cycle for many first-time borrowers. No clear information or transparency on the fine details of a loan means you could be stuck with a loan that isn’t working for you.

The Top 5 reasons to refinance a personal loan

Maybe you want more money in the short-term? You can do this by reducing your repayments over a longer term.

Or…

Maybe you just got a new job and want to increase your repayments with a better rate, repaying your loan in half the time?

Here are the Top 5 Reasons for Refinancing:

1. Lower rates

The simplest: refinance with a lower rate and reduce the amount of total interest you pay, saving you money overall.

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2. Lower fees

Low rates aren’t great if you’ve got costly fees. Reduce, or eliminate, fees from your new loan to cut down on unnecessary monthly costs.

Fees on loans to be aware of

3. Better loan features

For those looking for a bit more freedom, this means flexible repayments (choosing which date to pay and the frequency) and the option to make extra repayments without getting penalised.

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4. Longer loan term

Not great if you’re looking to get debt-free sooner, but extending your term with a lower rate can drastically reduce repayments, making short-term debt easier to manage.

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5. Debt consolidation

Credit card, personal loan, and other debts piling up? Debt consolidation is like refinancing, but for all your debts, and can make repaying and managing existing loans much easier, with a single payment and interest rate.

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Find the best deal on personal loans

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What to look out for when refinancing your loan

If you want to refinance a personal loan, it's a very similar process to when you first applied.

The hardest bit is figuring out how to compare new offers against your existing debt.

3 Steps to follow

  • Check how much you’re paying on your loan and how often.
  • See what makes up these charges: the interest rate and any fees you’re paying.
  • Compare personal loan offers from lenders.

Make sure you only compare loans of the same type, over the same term and for the same loan amount.

This way, you’ll be able to use a comparison rate to quickly see which loan is the best.

Reminder

A comparison rate is the most accurate way to compare loans. It is the interest rate and fees loaded together into one rate. Each lender must provide this - it’s the law. It’s the fastest way to know which is the best deal. The lowest comparison rate is the lowest price.

Before you sign up for a new loan, double-check whether your existing loan has any fees or charges to exit.

Understand what a comparison rate is showing you

Types of fees you need to be aware of

Existing loan fees

  • Break fees - charged at the end of the loan
  • Extras repayment fees - charged if you make additional loan payments
  • Early exit fees - charged if you repay the loan early, in full.

New loan fees

  • Upfront costs - i.e. the cost of signing a new loan contract
  • Broker fees - if you decided to use a broker
  • Ongoing fees - annual fees and monthly fees
  • Late payment fees - charged if you miss a payment
  • Extra repayment fees - charged if you make early repayments to reduce the amount of interest payable on the principal amount.

Once you’ve compared your existing loan and costs with your new loan offers, it’s time to see if you can save some money and get a better deal. If you do, the only thing left to do is apply.

Apply for the new personal loan

If you have used our matchmaking process, you can select the lender of your choice and apply directly.

You will be directed to the lender’s website and need to supply all documentation as you normally would when applying for a new personal loan, which will most likely include:

  • Proof of identity — e.g. passport or driver licence
  • Proof of income — e.g. payslips, bank statements
  • Details of any current debts or other loans
How to qualify for a loan in Australia

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Here are the most popular questions people are asking about refinancing personal loans

In some cases, yes. While your lender will inevitably prefer to keep you on your current loan rather than give you a better deal, they may allow you to refinance your loan in order to keep your business. That’s why if you’re considering refinancing it may be a good idea to approach your current lender after you’ve shopped around to see if they’ll match the best deals you find.

Whether a fixed or variable interest rate is best for you will depend entirely on your circumstances. For more information visit our guide to personal loan interest rates.

Yes, many lenders offer unsecured personal loans that are ideal for refinancing. Keep in mind these may have higher interest rates than secured loans but offer far greater flexibility.

The best time to refinance is when you’ll be able to save money or it makes your life easier. Just keep in mind that it’s not always possible to refinance inside the first 12 months of your loan term.

The right personal loan can save you $1,000s

FIND YOUR PERSONAL LOAN

About the Author

Shaun McGowan from money.com.au

Shaun

McGowan

Shaun McGowan

Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.

*Information about comparison rates Comparison rates are designed to allow borrowers to understand the true cost of a loan by taking into account fees and charges, the loan amount and the term of the loan. The comparison rate is based on an unsecured fixed rate personal loan of $10,000 over 3 years. WARNING: Comparison rates are true only for the examples provided and may not include all fees and charges. Different terms, fees or loan amounts might result in a different comparison rate.