Can -- and Should -- You Refinance a Personal Loan?

Personal loans provide a versatile borrowing solution for many people who need to purchase something they can't pay for all at once.

Once you have taken out a personal loan, you're committed to paying it back with set payments from your checking account at a schedule you've agreed to with your lender. But depending on the circumstances, you may have the option to refinance. That would mean taking out a new loan, with new terms, and using it to pay off your existing personal loan.

Is refinancing a good idea? Here's what you need to know about whether you can or should refinance a personal loan.

Can you refinance a personal loan?

Refinancing a personal loan is possible. You are allowed to take out a personal loan to use the money for just about anything that you want, which includes paying off an existing personal loan debt.

In order to refinance, you would need to:

• Apply for a new personal loan that has more favorable terms
• Get approved and receive the funds from the new personal loan
• Use the money from the new personal loan to repay your existing debt
• Begin making payments on your new loan

It can be easier to get approved for the new loan if you have good credit and a record of on-time payments.

Should you refinance a personal loan?

While you can refinance a personal loan as long as you can qualify to borrow from a new lender, you only want to do this in circumstances where it makes financial sense.

In general, you would want to refinance only if your new loan has a lower interest rate than your current one. You don't want to refinance to a higher rate loan, because you'd raise your borrowing costs by doing this. You'd have to pay more in interest to your lender each month, which would make your loan harder to repay.

You also need to consider the repayment timeline of the new debt versus your existing loan. See, if you reset the clock on repayments and it takes longer to pay off your debt, you could pay more over time even if your rate is lower.

Say, for example, that you currently owe $5,000 on a loan at 13% APR and you have three years left to pay back the loan. If you're thinking of refinancing to a new loan at 8.00% with a five year repayment term, here's what that would look like.

Your refinance loan would cost you more over time, although you would save a bit each month. This happens if you pay interest for longer. You would also be repaying your debt for two extra years, which would mean you wouldn't have that money each month to devote toward other goals.

You'll have to carefully consider both the new monthly payments and total payoff costs when deciding if refinancing your personal loan makes sense. You may decide the savings each month are worth a little bit of extra interest -- but you may also decide you'd rather just be free of your debt sooner.

The key is to consider both options carefully, understand the long-term impacts of your decision, and make a fully informed choice about whether refinancing a personal loan is right for you.