When and How to Refinance Personal Loan

July 21, 2023 • 1231 views

Loan refinancing is a smart way to pay off existing debt at a more favourable interest rate, especially if you seek better repayment terms. Refinancing is a good option if you need to extend your repayment timeline or, say, your credit score has improved, and you can now apply for a lower interest rate. In this blog, you will learn about what is refinancing and how it can help you in your financial journey.

Refinancing - Definition, Types and How It Works?

If you are wondering what is refinancing a loan, it is a process of paying off an existing loan with a new one that offers lower interest rates or the repayment amount. This is usually done by borrowers when they find it difficult to manage the burden of the EMIs or the high-interest rates, or simply because another lender is offering a loan at much better terms.

Refinancing your Personal Loan can be a good choice if you are having trouble managing your loan payments and need an extended tenure. While the total amount you pay will increase in this case, the longer tenure will make timely payment easier. Conversely, if you are in a better financial position, you can consider refinancing to shorten your loan tenure. This will ensure that you can be debt-free sooner and save up on interest payments.

Once your refinancing application is approved, you get a new contract that replaces your original agreement. From here, you will be paying all your EMIs to the new lender.

How Does Refinance Work?

If you are looking to refinance your Personal Loans, you must first approach either your existing lender or a new one with a refinancing request and submit a new loan application. Before you apply for refinancing, check your credit score; a good credit score can fetch your favourable loan terms. If you decide to opt for a new lender, do your research, compare interest rates, and other benefits offered.

Your lender will then re-evaluate your credit terms and financial situation to consider your request. Once your lender approves your refinancing request, a new loan agreement with the new terms will be created and applied to your existing loan.

Different Types of Refinancing Loan

Rate-and-Term Refinancing

This is the most common form of refinancing. Here, you get to replace an existing loan with a new one that has better terms. You may opt for rate-and-term financing when the market conditions are favourable, your credit score has improved, or when your income changes.

Cash-out Refinancing

With cash-out refinancing, you take on a new, larger mortgage to pay off your existing mortgage. Here, the new lender will take over your existing loan and give you a cheque for the surplus funds. These funds have flexibility in usage, meaning you can use them as per your financial needs or wants.

Cash-in Refinancing

This is like cash-out refinancing, except you pay a lump sum amount to reduce your loan balance. Now that you have a smaller loan amount to repay, refinancing this loan can offer you a lower EMI or a shorter loan term.

Consolidation Refinancing

If you have many high-interest loans, the monthly costs can harm your financial health and keeping track of all the loans can be difficult. This is where you can turn to consolidation refinancing or debt consolidation. It refers to taking one loan with good terms to pay off all your other debts. Consolidating your debt offers a host of advantages like getting lower-cost loans, easier and organised monthly payments, and an improved credit score if you pay off your debt on time.

Benefits of Refinancing Personal Loan

Refinancing a Personal Loan can bring you many benefits, from getting a lower interest rate to improving your credit score. Here is how it works:

Lower Interest Rates

If you have improved your credit score or the interest rates have dropped, you can save significant money with a refinance loan.

Quicker Payoff

You can shorten the duration of your Personal Loan by refinancing it and paying off your debt more quickly. By reducing your loan term, you can also reduce the interest rate paid and save money.

Extend Repayment Periods

If you have difficulty making monthly payments, you can extend your loan repayment cycle. For example, if you might have just lost your job or something that needs immediate financial attention, you can decrease your monthly loan amount by extending your loan tenure.

Payment Stability

Switch from a variable to a fixed interest rate for increased payment stability and gain predictability for possible savings. This way, you can be prepared in advance with a fixed interest rate and manage your finances more efficiently.

Improved Credit Score

By refinancing a loan to more favourable terms, you will be more able to make on-time payments, increasing your credit score in the long run. A higher credit score may in turn fetch you better loan terms, such as lower interest rates and higher loan amounts.


The bottom line is that refinancing a loan, be it personal or otherwise, offers a host of advantages when done correctly. It makes repayment of the loan easier and helps reduce its borrowing cost. Now that you know about refinancing and how they work, make sure you review your expenses, needs, loan requirements, and terms before deciding on your refinancing terms.

Frequently Asked Questions

  • When to refinance?

You may want to consider refinancing due to multiple different reasons. However, the best time to refinance is when you have a better credit score, your income has undergone a change, or when you would like to settle your debt quicker by paying off your loan faster.

  •  Is it wise to refinance a loan?

Refinancing a loan is a good idea to help you manage and stabilise your income and finances. It can help you increase your credit score, save money on interest rates, and may fetch you better loan terms than your last loan.

  • Can you save money by refinancing a loan?

Yes, you can save money by refinancing, shortening your repayment period, or decreasing your loan interest rates with consolidation refinancing.


We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Personal Loan disbursal is at the sole discretion of Poonawalla Fincorp.
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poonawalla fincorp team

Poonawalla Fincorp Team

Our team of expert writers and editors are passionate about providing authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

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