Personal Loan Refinancing: How Does It Work?
Personal loan refinancing is the process of taking out a new loan to pay off an existing personal loan, often to secure a lower interest rate, reduced monthly payments, or better loan terms. This financial strategy can help borrowers save money and improve cash flow, but it also has potential risks. Below is a comprehensive guide to understanding how personal loan refinancing works, its benefits, drawbacks, and how to determine if it’s the right move for you.
1. What is Personal Loan Refinancing?
Refinancing a personal loan means replacing your current loan with a new loan from the same or a different lender. The goal is to secure better repayment terms that fit your financial needs.
How Does It Work?
✅ You apply for a new personal loan from a lender offering better terms.
✅ The new lender pays off your old loan balance in full.
✅ You start repaying the new loan under the new terms.
📌 Example:
- Existing Loan: RM30,000 at 12% interest over 5 years (monthly payment: RM667)
- New Refinanced Loan: RM30,000 at 8% interest over 5 years (monthly payment: RM608)
- Savings: RM59 per month and RM3,540 in total interest saved over 5 years
2. Reasons to Refinance a Personal Loan
✅ Lower Interest Rates
- If interest rates have dropped since you took your original loan, refinancing can reduce your total interest costs.
- Example: From 12% to 8% interest, you save thousands in interest payments.
✅ Lower Monthly Payments
- By extending your loan term, your monthly payment can be reduced, improving your cash flow.
- Example:
- RM30,000 loan for 3 years at 10% = RM968/month
- Refinanced to 5 years at 10% = RM637/month
✅ Shorter Loan Term
- If you can afford higher payments, you can refinance to a shorter loan term and pay off the loan faster.
- Example:
- RM30,000 loan for 5 years at 8% = RM608/month
- Refinanced to 3 years at 8% = RM940/month (faster repayment, less interest paid)
✅ Consolidate Multiple Loans
- If you have several personal loans, you can consolidate them into one loan with a single payment.
- Easier to manage and may come with lower interest rates.
✅ Improve Cash Flow
- If your financial situation has changed and you need extra cash, refinancing can provide relief by reducing monthly payments.
✅ Switch to a Better Lender
- Your original lender may have high fees or poor customer service.
- Refinancing allows you to switch to a lender with better terms and benefits.
3. When Should You Refinance a Personal Loan?
🔹 You qualify for a lower interest rate than your current loan.
🔹 Your credit score has improved, making you eligible for better rates.
🔹 You need lower monthly payments due to financial difficulties.
🔹 You want to shorten your loan term to pay off debt faster.
🔹 You want to consolidate multiple loans into one easy payment.
📌 When NOT to refinance?
❌ You’re near the end of your loan term – the savings might not be significant.
❌ The new loan has high processing fees or penalties that outweigh the benefits.
❌ Your credit score is too low – you might not get a better rate.
4. Steps to Refinance a Personal Loan
Step 1: Check Your Credit Score
- Lenders use your credit score (CTOS/CCRIS) to determine your eligibility.
- A higher credit score = lower interest rates.
Step 2: Compare Loan Offers
- Research different banks, online lenders, and financial institutions.
- Use loan comparison websites like:
Step 3: Calculate Savings
- Use an online loan calculator to check if refinancing will actually save you money.
Step 4: Apply for the New Loan
- Provide necessary documents:
✅ NRIC or passport
✅ Latest 3-6 months bank statements
✅ Salary slips (if employed) or business income proof (if self-employed)
✅ Existing loan statement
Step 5: Pay Off the Old Loan
- If approved, the new lender will settle your existing loan.
- Make sure your old loan is fully closed to avoid additional interest charges.
Step 6: Start Repaying the New Loan
- Set up auto-debit payments to avoid late fees.
- Stick to your budget to prevent getting into further debt.
5. Top Banks & Lenders Offering Personal Loan Refinancing (Malaysia 2025)
| Lender | Interest Rate | Loan Amount | Loan Tenure | Key Features |
|---|---|---|---|---|
| Maybank Personal Loan | 6.5% – 9.5% | RM5,000 – RM150,000 | 2 – 6 years | No guarantor required |
| CIMB Cash Plus Loan | 6.88% – 14.88% | RM2,000 – RM100,000 | 1 – 5 years | Fast approval |
| RHB Easy-Pinjaman Ekspres | 8.18% – 13.45% | RM2,000 – RM150,000 | 1 – 7 years | No collateral needed |
| Bank Rakyat Personal Financing-i | 4.54% – 7.82% | RM5,000 – RM200,000 | 1 – 10 years | Islamic financing |
| Alliance Bank CashFirst | 4.99% – 8.99% | RM5,000 – RM150,000 | 1 – 7 years | No hidden fees |
🔗 Check eligibility & apply online:
6. Pros & Cons of Refinancing a Personal Loan
✅ Pros
✔ Lower interest rates → Saves money over time.
✔ Lower monthly payments → Frees up cash flow.
✔ Faster loan repayment → Shorter loan term means less interest paid.
✔ Simplified payments → Easier to manage one loan.
❌ Cons
✖ Processing fees & penalties → Some lenders charge high fees.
✖ Longer loan terms can mean more interest paid overall.
✖ Credit score impact → A new loan application may temporarily lower your credit score.
✖ Potentially higher total cost if the loan term is extended too much.
7. Conclusion: Should You Refinance Your Personal Loan?
✅ YES, refinance if:
- You can get a significantly lower interest rate.
- You need lower monthly payments for better financial flexibility.
- You want to combine multiple loans into one easy payment.
❌ DO NOT refinance if:
- The fees and charges cancel out the savings.
- Your new loan term extends too long, leading to more interest overall.
- Your credit score is too low to qualify for better rates.
💡 Final Tip: Always compare loan offers, read the fine print, and calculate the actual savings before deciding to refinance. If done correctly, refinancing a personal loan can be a great way to reduce financial stress and save money! 🚀
