Refinancing a personal loan can sound like a clever financial move. It’s a fresh start with lower repayments, a chance to tidy up your debt or free up some breathing room to take on other goals. But like any money decision, it’s not always black and white. Whether or not it’s the right step depends on your circumstances and the numbers behind the deal.
This article breaks down everything you need to know: What personal loan refinancing means, when it’s a smart choice and when it might not be. It also answers one of the most common questions people ask: Does refinancing a personal loan hurt your credit?
Key takeaways: Is refinancing a personal loan a good idea?
What does refinancing a personal loan mean?
Personal loan refinancing means taking out a new loan to pay off an existing one, ideally with more favourable terms. That might mean a lower interest rate, fewer fees or a repayment period that suits your life better. In essence, you’re replacing one loan with another that works harder for you.
As mentioned, this move isn’t only about cheaper rates. Many Australians also use personal loan refinancing to consolidate several debts into one straightforward repayment, often at a lower overall rate. Refinancing can be an effective way to simplify obligations, provided you don’t extend your term so far that you end up paying substantially more in interest over time.
Why people consider refinancing (the pros)
There are numerous legitimate reasons why refinancing a personal loan appeals to borrowers, but not all of them involve immediate savings.
1. Lower interest rate and repayments
The most common motivation for refinancing a personal loan is securing a better interest rate. Even a slight drop in the rate can make a substantial difference to your overall payment. Let’s say you borrowed $10,000 a year ago to buy a reliable used car. Since then, your credit score has improved. If your current lender is charging 11% p.a. but you now qualify for a loan at 7% p.a., refinancing could save you hundreds over the life of the loan.
Borrowers with improved credit scores or stronger repayment histories often qualify for lower rates when refinancing. That means you benefit directly from your own financial discipline.
2. Consolidating debts into one repayment
Managing multiple debts — a car loan, a credit card and, say, a payday loan that seemed like a quick fix at the time but ended up costing far more than expected — can quickly become stressful. Refinancing can merge those into one simple repayment, ideally with a lower rate.
Debt consolidation and balance transfer are some of the smarter uses of refinancing, particularly when your new loan has no ongoing or hidden fees. And beyond the financial benefit, easing that constant mental load of juggling repayments can make a genuine difference that frees up headspace and improves focus.
3. Adjusting your loan term
Life changes in ways you can’t always plan for. What worked for your budget two years ago might not work today. Refinancing gives you the flexibility to extend or shorten your term. Extending your term can reduce your monthly repayment and ease short-term cashflow pressure. Conversely, shortening it can help you pay the loan off faster and save on total interest.
4. Access to better loan features
When you refinance a personal loan, you may gain access to improved features such as flexible repayment schedules, redraw options or the ability to make extra repayments without penalties. These can make managing your loan easier and more empowering over time.
What to watch out for (the risks)
Sometimes it’s a good idea, but personal loan refinancing may not always be the right call. The costs and conditions matter just as much as the rate itself.
1. Exit or early repayment fees
Some lenders charge a fee if you pay off your current loan early, known as an early termination or break fee. While these aren’t universal, they can offset any savings from refinancing. Always check your existing loan terms before committing.
2. Establishment fees on the new loan
Even if your new loan advertises a low rate, set-up or establishment fees can erode your potential savings. A “no fee” structure makes comparison straightforward, but not all lenders operate that way.
3. Longer repayment terms increase total interest
It’s tempting to stretch your new loan term to reduce monthly repayments, but that can mean paying more interest over time. Borrowers are advised to calculate total costs, not just monthly affordability.
4. Short-term impact on credit
Applying for a new loan triggers a credit check, which may cause a temporary dip in your score. This effect usually fades as you make steady repayments, but it’s still worth factoring in.
5. The temptation to borrow more
When you refinance, lenders may offer a higher borrowing limit. Taking on extra unnecessary debt can undo the benefits of this option, especially if it leads to higher monthly commitments. In other words, it can defeat the purpose entirely. And let’s be honest: It’s easy to overestimate your discipline when extra money suddenly hits your account. Don’t forget how quickly impulse spending can unravel a solid financial plan.
Does refinancing a personal loan hurt your credit?
This is one of the most frequently asked questions by borrowers, and rightly so.
When you apply for personal loan refinancing, your new lender will typically run what’s known as a hard credit enquiry. This check appears on your credit file and may cause a small, temporary dip in your score, usually just a few points. It’s not a sign of financial trouble; it’s simply how the system measures new credit applications. That dip generally fades within a few months, especially if you continue making on-time repayments.
A well-managed refinance can contribute to long-term credit health, even if your score dips slightly during the transition. By consolidating debts and paying them down steadily, you demonstrate consistent, responsible borrowing behaviour. Responsible refinancing can actually improve your credit profile by lowering your credit utilisation ratio, which is the percentage of your available credit that you’re using.
It’s also worth noting that opening a new loan and closing the old one changes the “age” of your credit accounts. That can affect your score slightly because a newer account shortens your average credit history. But again, if you maintain healthy habits, this is only a short-term effect. The real danger isn’t refinancing itself, but mismanaging your new loan.
Keeping up with your new repayments, avoiding extra borrowing and steering clear of missed payments will see your score rebound and often improve over time.
How to refinance a personal loan
If you’ve decided that refinancing your personal loan is a good idea, the process is relatively straightforward. Here’s how to approach it with confidence.
1. Review your current loan
Start by checking the basics: your remaining balance, current interest rate, repayment amount and any exit or break fees. We recommend you write these details down, as seeing them clearly on paper (or in a spreadsheet) helps you understand your current position and makes it easier to compare new offers side by side.
2. Compare new loan options
Shop around and look for lenders who offer genuinely competitive rates and clear, transparent terms. Pay close attention to comparison rates, not just advertised rates, as these reflect the total cost, including fees. If a lender has no fees at all, even better! That makes your decision simpler and more transparent.
3. Check your eligibility
Your credit score, income and overall financial position all influence whether you’ll qualify for a better deal. If you’ve been repaying reliably and your financial situation has improved, you’ll likely be viewed as a lower-risk borrower.
It’s also worth considering whether a secured or unsecured loan makes more sense for you this time. A secured loan, one backed by an asset like a car, often comes with a lower interest rate because it poses less risk to the lender. An unsecured loan, on the other hand, doesn’t require collateral but typically carries a higher rate in exchange for that flexibility.
4. Apply for the new loan
Once you’ve found the right option, submit your application. The new lender will assess your financials and credit history. If approved, they’ll usually handle paying out your existing loan directly, meaning you won’t be managing two loans at once.
5. Close out the old loan
Confirm that your old loan has been fully paid off and the account has been closed. Keep written confirmation for your records.
6. Focus on consistent repayments
Now that you’re on a fresh schedule, stay disciplined. Set up automatic payments if possible to avoid late fees or credit hits. The goal is to use this refinance as a reset point — one that moves you closer to financial stability, not further from it.
See how much better your personal loan could be with NOW Finance
Refinancing a personal loan can be a smart move when it’s done with purpose, not impulse. It can help you cut costs, simplify your debt and take back control of your finances. But the right decision comes down to the transparency and reliability of your lender.
With NOW Finance, you get a no-fee personal loan and a genuinely human experience without the complications of dealing with a big bank. Our comparison rates are identical to our interest rates, so what you see is exactly what you get, with no hidden costs or fine print. Whether you want to consolidate debt or secure a better deal, we make the process straightforward and transparent.
Ready to see what personal loan refinancing could look like for you? Contact us or get your custom rate today.
Disclaimer: This article contains factual information only and does not constitute financial advice, a recommendation, or an offer of any kind. It has been prepared without considering your personal objectives, financial situation, or needs. Before taking any action, you should assess whether the information provided is appropriate for your circumstances. If this article discusses the acquisition or potential acquisition of a specific credit product, you should obtain and review the relevant disclosure documents before applying. The information is believed to be accurate as at the date of publication; however, changes in circumstances after this date may affect its accuracy.
