Refinancing your loan means replacing your existing loan with a new one—ideally at a lower interest rate or better terms.
Done right, refinancing can save you hundreds or thousands of pounds. Done wrong, it can cost you more than you save.
This guide shows you when refinancing makes sense, how to calculate the break-even point, and what to watch out for.
What is loan refinancing?
Refinancing = taking out a new loan to pay off your existing loan.
You’re essentially replacing one debt with another, but with better terms—usually a lower APR, shorter term, or lower monthly payment.
Why refinance?
- Lower interest rate – save money on interest
- Reduce monthly payments – free up cash flow (but may cost more over time)
- Shorten the loan term – become debt-free faster
- Consolidate multiple debts – simplify payments into one loan
The most common reason is securing a lower interest rate, which reduces both your monthly payment and total cost.
When refinancing makes sense
1. Your credit score has improved
If your credit score has increased since you took out your original loan, you’ll likely qualify for a better rate now.
Example:
- Original loan: £15,000 at 12.9% APR, 48 months = £404.63/month
- Refinanced loan: £12,500 remaining at 7.9% APR, 36 months = £393.02/month
You save £11.61/month, become debt-free 12 months earlier, and pay £1,087 less in total interest.
2. Interest rates have fallen
If market rates have dropped since you borrowed, refinancing locks in the lower rate.
Between 2021 and 2023, rates rose sharply. If you took out a loan during the peak and rates have since fallen, it may be a good time to refinance.
3. You have multiple high-interest debts
Consolidating several expensive debts into one lower-rate loan simplifies payments and saves money.
Example:
- Credit card 1: £3,000 at 24.9% APR
- Credit card 2: £2,500 at 29.9% APR
- Personal loan: £5,000 at 11.9% APR
- Total: £10,500 at average 21.6% APR
Refinance into a single loan at 8.9% APR over 48 months:
- New payment: £259.88/month
- Interest saved: £4,800+ over the life of the loan
Compare consolidation options to see if refinancing saves you money.
4. You can afford higher payments to clear debt faster
If your income has increased, refinancing to a shorter term with higher payments saves significant interest.
Example: £10,000 remaining at 9.9% APR over 36 months
- Current payment: £323.14/month
- Refinance to 24 months at 8.9%: £459.62/month
- Time saved: 12 months
- Interest saved: £462
When refinancing doesn’t make sense
1. Early repayment charges exceed savings
Many loans charge 1-5% of the outstanding balance as an early repayment fee.
Example:
- Outstanding balance: £8,000
- Early repayment charge: 3% = £240
- Refinancing saves £180 in interest over remaining term
- Net result: You lose £60
Always calculate whether savings exceed fees before refinancing.
2. You’re near the end of your loan
Most loan interest is paid in the early years. If you’re within 6-12 months of paying off your loan, refinancing likely won’t save much.
Example: £1,200 remaining balance, 10 months left at 8% APR
- Remaining interest: ~£40
- Refinancing fees: £100+
- Not worth it
3. Your credit score has worsened
If your credit score dropped since taking out your original loan, you’ll be offered a higher rate—not lower. Refinancing would cost more.
Fix your credit first, then consider refinancing in 6-12 months.
4. You’re extending the term to lower payments
Refinancing from 24 months remaining to a new 48-month loan lowers your monthly payment but increases total interest dramatically.
Example: £7,000 remaining at 7.5% APR
- Current: 24 months left at £318.31/month (£637 interest remaining)
- Refinanced: 48 months at £170.64/month (£1,190 total interest)
- You pay £553 extra for the lower monthly payment
Only do this if cash flow is critical—otherwise, it’s expensive.
How to calculate your break-even point
The break-even point is how long it takes for interest savings to exceed refinancing fees.
Step-by-step break-even calculation
Let’s say:
- Outstanding balance: £10,000
- Current APR: 10.9%, 30 months remaining, £351.70/month
- New loan APR: 7.9%, 30 months, £329.86/month
- Early repayment charge: 2% = £200
Monthly saving: £351.70 - £329.86 = £21.84
Break-even: £200 ÷ £21.84 = 9.2 months
After 10 months, you’re saving money. If you plan to keep the loan for at least another 10 months, refinancing makes sense.
If you’ll repay the loan in 6 months anyway, don’t refinance—you won’t recoup the fees.
How to refinance your loan
Step 1: Check your current loan details
Find out:
- Outstanding balance
- Current interest rate and APR
- Remaining term
- Early repayment charges (check your loan agreement or call your lender)
Step 2: Check your credit score
Use free services like ClearScore, Experian, or Credit Karma.
A higher credit score qualifies you for better rates. If your score has dropped, wait and improve it first.
Step 3: Compare refinancing offers
Shop around for the best rate. Check:
- Banks
- Building societies
- Online lenders
- Peer-to-peer platforms
Compare loans side-by-side to find the lowest APR with the best terms.
Step 4: Calculate total cost
For each offer, calculate:
- New monthly payment
- Total interest paid
- Early repayment charge on current loan
- Arrangement fee on new loan
- Total cost = new interest + old loan exit fee + new loan arrangement fee
Compare this to the total cost of keeping your existing loan.
Step 5: Apply and refinance
Once you’ve found a better deal that passes the break-even test:
- Apply for the new loan
- Use the new loan to pay off the old one
- Start repaying the new loan
Make sure the timing is coordinated—don’t let a payment gap cause missed payments or late fees.
Real UK refinancing example
Original loan:
- Amount borrowed: £18,000
- APR: 11.9%
- Term: 60 months
- Monthly payment: £402.14
- Total to be repaid: £24,128.40 (£6,128.40 interest)
Current situation (30 months into loan):
- Outstanding balance: £11,847
- Remaining term: 30 months
- Remaining interest: £2,215
Refinancing offer:
- New loan: £11,847 at 7.9% APR over 30 months
- Monthly payment: £393.02
- Total repaid: £11,790.60
- Total interest: £943.60
- Early repayment charge: £237 (2%)
Comparison:
- Current total cost (remaining): £11,847 + £2,215 = £14,062
- Refinanced total cost: £11,790.60 + £237 = £12,027.60
- Total saving: £2,034.40
Refinancing saves over £2,000 and reduces the monthly payment by £9. Clear win.
Model your own scenario to see if refinancing works for you.
Alternatives to refinancing
1. Negotiate with your current lender
Some lenders offer “loyalty rates” or will match competitors’ offers to keep you as a customer. Call and ask—worst case, they say no.
2. Make overpayments instead
If refinancing fees are high, overpaying your existing loan might save more money with less hassle.
Even £50-£100/month extra reduces interest significantly. Calculate overpayment savings to compare.
3. Balance transfer credit card (for smaller debts)
If your outstanding balance is under £5,000 and you can repay within 18-24 months, a 0% balance transfer credit card saves more than refinancing.
Just ensure you clear the balance before the 0% period ends.
Put it into practice
Refinancing works when savings exceed fees and you’re early enough in your loan term to benefit.
Before refinancing:
- Calculate your break-even point
- Compare lenders for the best refinancing rate
- Use our loan calculator to model before and after scenarios
For more practical finance guides, explore our guides.
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Put This Into Practice
Use our free calculators to model your own scenarios