When to Refinance Your Personal Loan in Australia

If you took out a personal loan a year or two ago, circumstances may have changed—either in your personal finances, the lending market, or both. Refinancing, which involves taking out a new loan to pay off your existing one, can sometimes save you significant money or provide better terms. However, it's not always the right move. This guide helps you understand when refinancing makes sense and how to approach it effectively.

What Is Refinancing?

Refinancing a personal loan means replacing your current loan with a new one, typically from a different lender. The new loan pays off your existing debt, and you continue making payments on the new loan under its terms. Essentially, you're switching your debt from one lender to another.

People refinance for various reasons: to secure a lower interest rate, reduce monthly payments, consolidate multiple debts, access additional funds, or switch from a variable to fixed rate (or vice versa). The goal is usually to improve your financial position in some meaningful way.

When Refinancing Makes Sense

Interest Rates Have Dropped: If market interest rates have decreased since you took out your loan, you might qualify for a lower rate now. Even a reduction of 1-2% can translate to significant savings, especially on larger loans or longer remaining terms.

Your Credit Score Has Improved: If your credit score was lower when you originally borrowed and has since improved through responsible financial management, you might now qualify for better rates than you received initially. The rate you pay reflects the risk you represented at application—if that risk profile has improved, you deserve better terms.

You're Paying High Fees: Some older loans or loans from certain lenders come with high monthly fees that increase your effective interest rate. Refinancing to a loan with lower or no fees can reduce your overall costs.

You Need Different Loan Features: Perhaps your current loan doesn't allow extra repayments, or you want to switch from a variable rate to a fixed rate for budget certainty. Refinancing can provide access to features your current loan lacks.

You Want to Consolidate Debts: If you've accumulated additional debts since taking out your original loan, refinancing into a larger loan that consolidates everything can simplify your finances and potentially reduce total interest costs.

When Refinancing Doesn't Make Sense

You're Near the End of Your Loan: In the early years of a loan, most of your payment goes toward interest. As you progress, more goes to principal. If you're well into your loan term, you've already paid most of the interest. Refinancing effectively restarts this process, potentially costing you more than staying put.

Early Termination Fees Are High: Some loans, particularly fixed-rate products, charge substantial fees for early repayment. If these fees exceed your potential savings from refinancing, the switch isn't worthwhile.

The Savings Are Minimal: Refinancing involves effort and potentially some costs. If the difference between your current rate and a new rate is small (say, less than 1%), the savings might not justify the hassle.

You're Extending the Term: Refinancing into a loan with a longer term reduces monthly payments but increases total interest paid. Unless you genuinely need lower payments, this approach costs you money in the long run.

Calculating Whether Refinancing Is Worth It

To determine if refinancing makes financial sense, you need to crunch the numbers:

Step 1: Determine your current loan's remaining balance and remaining term.

Step 2: Calculate the total remaining cost of your current loan—remaining payments multiplied by the number of remaining months.

Step 3: Get quotes for new loans covering the remaining balance over the same term.

Step 4: Calculate the total cost of the new loan, including any establishment fees.

Step 5: Add any early termination fees from your current loan to the new loan's total cost.

Step 6: Compare the totals. If the new loan (including all fees) costs less than continuing your current loan, refinancing makes financial sense.

Use our personal loan calculator to model both your current loan and potential new loans to see the actual numbers.

The Refinancing Process

If you decide to refinance, the process typically involves:

Research: Compare offers from multiple lenders. Look at interest rates, comparison rates, fees, and loan features.

Application: Apply for the new loan as you would any personal loan. You'll need to provide income verification, identification, and other standard documentation.

Approval: If approved, the new lender will provide loan documents for your review and signature.

Payout: Once you accept, the new lender typically pays off your existing loan directly. You won't have to handle the money yourself.

New Repayments: You'll begin making repayments on your new loan according to its terms.

Tips for Successful Refinancing

Don't just refinance with the first lender who offers a lower rate. Shop around to find the best overall deal, considering rates, fees, and features.

Try to refinance for the same remaining term as your current loan, not a longer period. This ensures you're genuinely saving money rather than just stretching payments.

Read the fine print on your current loan to understand any early exit costs before committing to refinancing.

Consider your near-term plans. If you might pay off the loan early or need to borrow more soon, choose a flexible product that accommodates those needs.

Don't let the promise of savings lead you to borrow more than you currently owe. Refinancing should reduce your debt burden, not increase it.

The Bottom Line

Refinancing can be a powerful tool for reducing borrowing costs, but it requires careful analysis to ensure it's genuinely beneficial. The key is comparing the total cost of your current loan against the total cost of the new loan, including all fees and charges.

If the numbers work in your favour, refinancing could save you hundreds or thousands of dollars. If they don't, staying with your current loan and focusing on extra repayments might be the better strategy.