Refinancing your personal loan? Here’s what to look for

If you’re like many other Aussies with a personal loan, you probably signed the papers and never looked back. But have you ever stopped and wondered about the potential savings you'd get if you were to refinance? Now, now, don’t let the word ‘refinance’ scare you away. With our help, refinancing your personal loan will be a piece of cake, only the savings will be far sweeter!

Refinancing a personal loan is when you move your existing debt obligation over to a new lender under new loan terms. There are many different reasons why you might consider refinancing your personal loan, but generally, it’s about finding a more competitive loan or one better suited to your current financial needs. 

One person’s reasons for refinancing their personal loan can be drastically different from the next persons’. However, here are a few common reasons as to why people will refinance their personal loans.

• Debt consolidation
  

One reason you might consider refinancing your personal loan is for debt consolidation. If you’ve got multiple debts, say two credit cards and a personal loan, then rolling them all into one debt consolidation loan means you'll only have one interest rate and one regular loan repayment to worry about rather than multiple rates and loans repayments for each debt. Think of it as a way to spring-clean your debt and hopefully save money by getting a better rate.

If you do choose to refinance with a debt consolidation loan, make sure you have a plan for paying it off, so you’re not just shifting the debt around.

• Your financial circumstances have changed
  

Another reason you might consider refinancing your personal loan could be a change in your financial situation. Whether it’s good or bad, any significant changes in your financial circumstances can potentially change what you're looking for in a loan.

Scenario 1: Your credit has improved

So you’ve worked hard to keep on top of your loan repayments, and your credit score has significantly improved because of this. Good news! If your credit score has improved since you first applied for your loan, it's very likely that you’re now eligible for a loan with more competitive features and rates. In this scenario, refinancing your personal loan could potentially land you better savings in the long run.

Scenario 2: You’re struggling with your monthly budget

If finding the cash to pay for your daily living expenses has gotten tough, keeping up with your loan repayments can seem impossible. If money's gotten tighter since you first got your loan, refinancing to a longer term or lower interest rate is one way to ease the squeeze in your budget.

Scenario 3: You need access to more funds

When it comes to money, things can change in the blink of an eye. Whether the reno’s costing a bit more than expected or you’ve got an unexpected vet bill to cover, refinancing a loan to borrow a bit more can be more convenient than applying for a new one.

• You want to change your loan repayment term
  

Similarly to the other scenarios mentioned above, you could find yourself in a situation where you need to refinance your personal loan to alter the length of your repayment term.

Scenario 1: You want to pay your personal loan off quicker

If conditions have changed, and you’re now in a position to pay your loan off faster than what your set term period allows, this could be grounds for refinancing. If your current loan doesn’t let you make extra repayments, you might refinance to a shorter loan term to increase your regular repayment amount or to a loan that allows free extra repayments. Doing this could potentially save you on your total interest.

Scenario 2: You need more time to pay off your loan

On the other hand, if you’re struggling with monthly repayments or need a little more time to pay off your loan, you might consider refinancing to increase your loan term. The benefit in this is that your regular loan repayments will be smaller, but the drawback could potentially be that you’ll pay greater total interest in the long run.

• You want a better deal
  

A savvy borrower is always on the lookout for a better deal. By running a comparison check, chances are you could find a more competitive rate than what your current loan offers. Have a look at our personal loan switch and save calculator to find competitive offers filtered down to your specific needs.

It would be a little naive to think that your lender will let you pack up and switch to a new personal loan scotfree. There are usually some fees associated with refinancing your personal loan. Here’s what to look for:

• Break cost fees: When refinancing your personal loan it’s pretty standard to be charged an exit fee by your current lender as a penalty, so always remember to read the terms and conditions. If the break cost fee is more than you’d save by switching, refinancing might not be worth it.

Break cost fees: When refinancing your personal loan it’s pretty standard to be charged an exit fee by your current lender as a penalty, so always remember to read the terms and conditions. If the break cost fee is more than you’d save by switching, refinancing might not be worth it.

• Application fees: When you apply to refinance your personal loan, your new lender is likely to charge you an application fee to cover administration costs, credit checks and other steps involved in the application process. Application fees vary from lender to lender, but they can reach up to as much as $600, so remember to check this when deciding on your new personal loan.

• Service fees: Your new loan might incur a regular monthly service fee. Usually, this would sit at around $10.00 per month, but don't be fooled; this adds up quickly. Thankfully, more and more lenders are starting to ditch the service fee, but it never hurts to double check the fine print, just to be sure!

While you want to avoid fees, there's a couple of good things to look out for when refinancing your personal loan, like flexible features and competitive rates. Here’s a breakdown of what you should consider when choosing a new loan:

• Interest Rates

Interest Rates

Different types of interest rates are going to suit you better at different times. When refinancing your personal loan, you should consider the pros and cons of each interest rate option before locking one in.

Fixed interest rates: If you’d like more consistency in your loan repayments and the comfort of knowing that your rate won’t fluctuate, a fixed rate loan could be the way to go. Be aware though, the potential price you’ll pay for predictability could be having to sacrifice flexible features like making additional loan repayments or redraws.

Variable interest rates: On the other hand, you might choose to refinance to a variable interest rate. You’ll generally find these rates to be more competitive than a fixed rate, and they usually come with more flexible features. A variable interest rate means your repayments may vary from month to month, but the flip side of taking a gamble on a variable interest rate is that if interest rates drop, your regular repayment amount will drop also.

Personalised loan rates: If you’ve got a high credit score, you should consider refinancing to a personal loan with a personalised loan rate. By opting for a personalised loan rate, your lender will tailor your new rate according to your credit score. So, if your credit score is high, you could potentially earn a lower rate, meaning greater savings in the long run.

• Features

Features

When refinancing your personal loan, always look at the features on offer and consider which will be of most use to you.

Extra repayments: In a perfect world, you’d pay off your loan as quickly as possible, and preferably in advance. Having the option to make free extra repayments on your loan means that every last penny can go toward being debt free earlier, thereby saving you on interest. You never know, you might end up getting that well-deserved salary bonus that’s just enough to cover your remaining balance.

Loan redraw facility: If you’ve made extra loan repayments, a loan redraw facility could come in handy when you need it the most. If you’re caught in a scram for cash, with a loan redraw facility at hand, you’ll be able to dip into any additional loan repayments you’ve made. However, you should try to keep this as a last resort for emergencies only, so that you can enjoy the benefits of paying off your loan ahead of schedule.

Flexible repayment schedules: If your employer pays weekly or fortnightly, then the standard monthly loan repayment cycle might not be for you. If your potential refinance loan provider gives you a say in your repayment schedule, figure out how you can use it to your advantage.

Example: By making a monthly loan repayment of $3,000, you’ll pay off $36,000 over the course of a year. However, by making a fortnightly repayment of $1,500, you’ll pay off $39,000 in the same amount of time.

Reviews

Word of mouth can be handy if you want a raw and honest opinion on a product or service. We recommend reading our personal loan reviews, as well as some customer reviews from the Mozo community so that you can get a range of different perspectives to help you make your final decision.

Don’t forget to use our switch and save calculator to determine your potential savings if you were to refinance your personal loan. Head over to our personal loan comparison table to get more bang for your buck in savings, features and competitive rates when refinancing your personal loan!