What is personal loan refinancing and should you consider it in 2025?

During a medical or any other emergency, an individual usually takes a personal loan from the first lender willing to give it. Due to the emergency, they can’t afford to spend time comparing which lender offers the lower interest rate and better terms. Once the emergency subsides, the existing personal loan (if it has been taken on a higher interest rate) can be replaced with another one at a lower interest rate through refinancing.

In this article, we will understand what personal loan refinancing is, why borrowers go for it, the factors to consider, and whether you should go for it.

What is personal loan refinancing?

Personal loan refinancing is the process of replacing an existing personal loan with another personal loan. Borrowers usually refinance for a lower interest rate, a longer tenure, etc. For example, Gaurav has taken a personal loan of Rs. 2 lakhs at a 14% interest rate p.a. for five years.

After one year, the market interest rates have dropped and Gaurav’s credit score has improved. He got a personal loan offer from another bank at an 11% interest rate p.a. Hence, Gaurav has decided to refinance his personal loan.

In a personal loan refinancing transaction, a borrower takes a new personal loan. They use the new personal loan amount to repay the existing personal loan and close it.

Why do borrowers go for personal loan refinancing?

Some reasons why borrowers go for personal loan refinancing include the following.

1. Lower interest rate: Most people go for personal loan refinancing to lower their interest rate. The borrower may have taken a personal loan when the market interest rates are high. For example, during the years 2022 to 2024, the RBI hiked interest rates and maintained them to combat high inflation.

However, in February 2025, the RBI cut the Repo Rate by 25 basis points. The RBI is expected to cut interest rates further in 2025. As market interest rates fall and liquidity improves, the interest rates on personal loans and other loans are expected to fall.

So, a borrower who took a personal loan at high interest rates in 2024, may look to refinance at lower interest rates in 2025. A lower interest rate leads to a lower interest outgo for the borrower, resulting in savings.

Some banks and NBFCs offer higher interest rates to individuals with a lower credit score. The borrower’s credit score may have improved over time. Hence, the borrower may use the higher credit score to get a personal loan at a lower interest rate and use the loan amount to refinance the existing personal loan.

2. Longer loan tenure: A longer loan tenure is another reason why some borrowers go for personal loan refinancing. If the existing personal loan tenure is short, it results in a higher EMI. A higher EMI puts pressure on the monthly cash flows and disturbs the family budget.

Refinancing an existing personal loan with another personal loan with a longer tenure will reduce the EMI. A lower EMI is easy on the pocket. However, it is important to note that a longer tenure will result in a higher interest amount.

3. Debt consolidation: A borrower can repay and close multiple smaller personal loans by taking a single new personal loan for the consolidated amount. Thus, personal loan refinancing can be used for debt consolidation.

Factors to consider

For personal loan refinancing, a borrower must factor in the costs involved. When you take a new personal loan, there will be a processing fee and some other costs. The processing fee can be a flat amount or a percentage of the personal loan amount. Check with the lender if the processing fee can be waived or reduced.

Closing the existing personal loan will involve a foreclosure fee. The foreclosure fee can be a flat amount or a percentage of the outstanding principal. Some lenders have a tiered structure for the foreclosure fee. As the loan repayment moves from one year to another, the foreclosure fee reduces with every passing year. For some lenders, the foreclosure fee is nil after a specified number of EMIs/years.

Some lenders don’t allow personal loan foreclosure till the loan completes a specified number of months/years. For example, some lenders don’t allow foreclosure during the first year.

Personal loan refinancing procedure

If you have decided to go for personal loan refinancing, you need to take the following steps.

1. Decide on the loan amount requirement: The first step is to decide on the personal loan amount that you need. Do you have some surplus funds and need a lower amount than the principal outstanding on the existing personal loan? Or do you want to borrow a higher amount than the principal outstanding on the existing personal loan as you need some funds for some other purposes also? Borrow any additional amount with caution only for essential purposes, or else it can put you in a debt trap.

2. Compare interest rates from various banks and NBFCs: Once the personal loan amount is finalised, compare the interest rates and other terms offered by various banks and NBFCs. You can use an online aggregator website/App to compare the interest rates and other features of the new personal loan. The other features include a discount/waiver on the processing fees, higher loan tenure, waiver/lower foreclosure fees, etc.

When you have a good offer in hand, discuss with the existing bank if they are willing to match it by lowering the interest rate on the existing personal loan. If they agree, you may continue your personal loan with them at a revised lower interest rate. If they don’t agree, you may go for a new personal loan with the other bank.

3. Avail of the new personal loan: Once you have finalised the bank or NBFC for the new personal loan, fill out the application form and submit it with the required documents. With the increased digital adoption, loan approval and disbursal times have reduced significantly.

4. Repay the existing personal loan: Once the new personal loan is disbursed, you can use the amount to repay the existing personal loan. Collect the ‘No Dues Certificate’ on personal loan closure. Start paying the regular EMI on the new personal loan.

Should a borrower go for it?

The decision of whether to go for personal loan refinancing depends on the net savings after considering the costs. Calculate the interest amount savings between the interest rate on the new personal loan and the existing one. From the interest savings, deduct the foreclosure fee on the existing loan and the processing fee on the new loan to arrive at the net savings. If the net savings are meaningful, you may go for personal loan refinancing. If the net savings are negative or mediocre, the whole personal loan refinancing process may not be worth the time and effort.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.