What is Loan Refinancing and Is It Worth Considering?

Loan refinancing (also called refi) is the process of replacing and organising the current credit agreement terms of a loan. The sole purpose of a refinance is to improve the terms of the loan, like the tenure or Equated Monthly Installments (EMIs) of the loan. If the refinance request is approved, borrowers get a brand new loan that replaces the existing one. 

The Indian refinance market is going through exponential growth driven by the need for flexible financial solutions. So much so that in 2025, India was among the leading refinance markets in the Asia Pacific region, with a revenue of USD 1.11 billion (and accounting for almost 5% of the global revenue).   

In this blog, we will answer all the questions you are seeking if you’re looking to refinance your loan. So, without further ado, let’s go!  

Key Takeaways

• What It Is: Refinancing replaces your loan with a new one on better terms, helping you lower your rate, adjust EMI or tenure, or consolidate debts.
• Types: Cash-out, cash-in, and rate-and-term, the last suiting strong credit and stable income.
• Benefits: Lower EMIs, shorter repayment, and simpler debt management, such as cutting 18% to 12%.
• Costs: Foreclosure and processing fees, plus a small credit score dip. Run a break-even calculation first.
• When to Skip: Fees match savings, the loan is nearly over, or the EMI is unaffordable. Ask your lender to match the rate first.

How Does Loan Refinancing Work?

Loan refinancing works through a series of sequential steps, such as reviewing the existing loan terms, comparing other lending institutions’ offers, calculating the benefits, applying for a new loan (refinancing), closing the old loan, and starting the repayment. The main objective of a refinance is to:

• Lower your interest rate
• Lower the Equated Monthly Installments (EMIs)
• Increase the loan tenure
• Opt for better offers and features
• Consolidate all your loans (also called debt consolidation)

For instance, if you already have a personal loan at an 18% interest rate, and KreditBee offers refinancing at 12%, transitioning to KreditBee can reduce your debt burden. 

It would be wrong to assume that loan refinancing is just for personal loans, home loans, car loans, and education loans. The benefits of loan refinancing extend beyond these, as large corporations also opt for loan refinancing to consolidate their debt. Recently, the Business Standard reported that Adani Group is planning to raise USD 2.5 billion to refinance its debt. According to experts, this would be one of India’s largest offshore loans this year.    

Here are the steps of loan refinancing:

1. Reviewing Existing Loan Terms: You check your existing loan terms like outstanding principal, remaining loan tenure, current rate of interest, and foreclosure penalties (if any). 
2. Comparing Offers from Other Lending Institutions: Once you are clear about your loan terms (existing), you start comparing the loan terms and offers from other banks, NBFCs (Non-Banking Financial Companies), and personal loan apps in India.
3. Calculating Your Benefits: After comparing and shortlisting financial institutions, you calculate the new EMI and total interest, subtract prepayment charges and processing fees, and find out the “Break-Even Point”. The break-even point is the time it takes for the borrower’s cumulative monthly savings to be equal to the upfront costs of acquiring a new loan.  
4. Applying for the New Loan: Once you have checked out and calculated the terms, you apply for a new loan. The new lender will do a hard credit inquiry and assess if you’re eligible for the refinance.
5. Old Loan Closure: The new lender can either directly pay off your existing loan (also called loan takeover), or you have to close it yourself. Always remember to ask for closure proof from the old lender. 
6. Start the Repayment: This is the final step where you start paying back the new loan after the refinancing.      

Does Refinancing Hurt Your Credit Score?

Yes, loan refinancing can affect your credit score. But refinancing impacts loans only by a few minor points. This generally happens because of a hard inquiry by the lender, premature loan closure, addition of a loan account, and missed EMI during the refinancing process. 

• Lender’s Hard Enquiry: When you decide to refinance your loan and apply, the lender starts checking your creditworthiness (from your credit profile). Frequent hard enquiries within a small amount of time can reduce your credit score, as it signals amplified credit dependency. 
• Premature Loan Closure: During refinancing, your old loan closes, and a new one replaces it. This leads to a change in your account history and credit mix. If the existing loan has a long repayment tenure, closing it early (even temporarily) can affect your credit score. 
• Addition of a New Loan: When the new loan is added during a refinance, it appears fresh in your credit account. This necessarily reduces the average age of your account, slightly impacting your credit score. 
• Missed EMI (during the Refinancing Processing): In case there’s slight confusion or delay in your EMI payment during the transition process, your score might get hurt.

Want to know where your credit profile stands? Check out your credit score now!    

What are the Types of Loan Refinancing?

The different types of loan refinancing include cash-out refinancing, cash-in refinancing, and rate-and-term refinancing. 

1. Cash-Out Refinancing

Cash-out refinancing is the process through which borrowers refinance their existing loans for more than they typically owe and take the difference in cash.

• Example: Your loan balance is ₹2 lakh. However, you qualify for a ₹2.5 lakh loan during refinancing. You can acquire that ₹50,000 and can use it for other purposes. 
• Best For: Borrowers who need extra funds for debt consolidation or other expenses. 

2. Cash-In Refinancing

In cash-in refinancing, the borrower opts to refinance the existing loan by making a large one-time payment, resulting in a reduction in the EMIs, shorter loan tenure, or both. 

• Example: You have a loan of ₹10 lakh. Now, you decide to refinance the loan by giving a lump sum of ₹5 lakh. So, the EMIs and repayment can be reduced because of the lower outstanding amount. 
• Best For: Borrowers who have a lump sum of money that they can refinance with. 

3. Rate and Term Refinance

This loan refinancing involves changing the credit terms, interest rate, or both of the existing loan. In this type of refinancing, the principal amount remains untouched. 

• Example: You have a personal loan with an interest rate of 18% per annum over a period of 5 years. With a rate and term refinance, you can change the interest rate to 12% p.a. and the tenure to 3 years.
• Best For: Borrowers with a strong credit profile and stable income.     

What are the Benefits of Refinancing?

Depending on the type of loan refinancing, the advantages include lower EMIs (Equated Monthly Installments), a shorter repayment period (loan tenure), and effective debt management and consolidation. 

Because of these advantages, India is seeing phenomenal growth in the personal loan market (which also includes refinancing). Market forecasts indicate that the personal loan market is expected to grow from USD 174 billion in 2025 to USD 397 billion by 2032 (with a CAGR of 12.5%).   

Reduced EMIs (Equated Monthly Installments)

Loan refinancing reduces the monthly payments by letting you shift from higher interest rates to lower ones. This has a positive impact on the payable amount and reduces the EMI amounts substantially. 

Debt Consolidation

Refinancing loans also allows you to consolidate all your small loans with high interest rates, replacing them with only one with lower interest rates. This way, you can streamline all your finances.  

Shorter Loan Repayment Period

There are times when you want loans with longer repayment periods. However, over time you may feel that your financial goals and situations have changed. So, you want to pay off the loan by refinancing and replace it with another with a shorter tenure.    

What are the Disadvantages of Loan Refinancing?

The disadvantages of loan refinancing are the cost, prepayment penalties, a small but significant impact on credit score, and overborrowing risk. 

While it’s advantageous to refinance loans, there are certain disadvantages that you need to consider:

• Costing: Although a refinance might sound tempting, you need to consider the additional costs that come with it. For instance, if you go for home loan refinancing, you have to incur charges like a home appraisal, application, or credit report fee. All these things can compound and increase the overall cost of the refinance. 
• Prepayment Penalties: Some lenders have prepayment penalties that penalize you for closing the loan early. The foreclosure charge or prepayment penalties can be a percentage of the amount due, or can be fixed. It’s extremely important to factor in these dimensions to avoid incurring additional costs. 
• Credit Score Impact (Temporary): During the transition (process of refinancing), your credit score gets impacted due to the lender’s hard enquiry, preclosure, addition of a new loan, or missed EMIs. It is something to look out for, in case you have a plan to take another loan shortly after. 
• Overborrowing Risks: Lower EMIs or a simplified structure can sometimes lead to an inflated sense of financial security. This can empower you to take on another debt, leading to a cycle of indebtedness.      

When Should You Not Refinance?

You shouldn’t opt for loan refinancing when the charges are more than your savings, you are at the end of your loan, the new EMI affects your budget, you have no scope for maintaining emergency funds, or when the approval works against you. 

When the Numbers Don’t Work for You

• If the foreclosure or prepayment charges (along with GST and processing charges) are almost the interest you save, you gain nothing. You can face this situation when the new interest rate is only 0.5% to 1% lower than the old loan. 
• In the last phase of your loan repayment, most of your loan is the principal amount. So, there’s very little to no room for saving on interest.

When Your Budget Can’t Handle the Refinance 

• A shorter loan tenure may increase the EMI amount. If your budget can’t handle the increased monthly payment, there is no point in refinancing. Even a few missed EMIs can be costlier than the interest you tried saving.
• If you have an unstable income or job, there is no purpose in loan refinancing as it is extremely income-driven. 
• In case you don’t have sufficient emergency funds, committing to a higher recurring payment can be disastrous if there’s even one bad financial month.  

When the Approval or Credit Terms Work Against You

• Suppose you have seen a drop in your credit score. You are unlikely to get a better interest rate. And a rejected loan refinancing application can leave a dent in your credit report.
• There are times when your existing lender may negotiate the rate (offered by another lender). If that happens, there will be no hard enquiry on your credit report. So, communicate first with your current lender before choosing another. 

You Lose Out on Special Features

• If your existing loan comes with special benefits, such as prepayment charges only after a certain period, or a relationship tied to your salary account, it’s better not to go for a refinance. 
• Lenders depend heavily on RBI’s repo rate when deciding their interest rate. Thus, it’s crucial to assess market conditions. If you expect the rates to drop in the near future, it’s better to wait than hastily choose one.  

Loan Refinancing Should be Planned, Not Impulsive!

Yes, loan refinancing can help you manage your finances better (only when the time is ripe). It can help you ease repayment, lower interest rates, and adjust loan tenures. However, it works best when the savings outweigh the charges and manage repayments effectively. For that, planning based on market conditions is essential.

If done right, you can get one step closer to the financial stability you seek with an effective refinance.    

Frequently Asked Questions

1. Is a personal loan refinance a good idea?

Ans: It can be, if the new rate is meaningfully lower and your credit profile is strong. It’s a poor idea when fees come close to your interest savings, or when you’re near the end of your loan.

2. Can I transfer my personal loan from one bank to another?

Ans: Yes. Banks, NBFCs, and personal loan apps all offer takeovers. The new lender runs a fresh credit check, approves the loan, and settles your old one. Ask for a closure letter from the old lender.

3. How much does it cost to refinance a loan?

Ans: Expect a foreclosure charge from your current lender (a percentage of the outstanding amount, or a fixed fee) plus a processing fee and GST on the new loan. Add these up and compare them with your projected interest savings.

4. Does loan refinancing hurt your credit score?

Ans: Slightly and usually temporarily. A hard inquiry, a new account, and the closure of an old one can each dip your score by a few points. A missed EMI during the switch can hurt more.

5. What should I check before refinancing a loan?

Ans: Check your outstanding principal, remaining tenure, current rate, and foreclosure charges. Then compare offers and calculate your break-even point, which is how long it takes for monthly savings to cover the upfront costs.

6. Is loan refinancing worth it if I’m almost done paying my loan?

Ans: No, it is not a good idea to refinance when you are close to paying back your loan. Late in the loan, most of each EMI is principal, so there’s very little interest left to save, and fees can wipe out the benefit.

7. Can I refinance with a low credit score?

Ans: It’s possible, but unlikely to get you a better rate. A rejected application can also leave a mark on your credit report, so improve your score first if you can.

8. Should I choose a lower EMI or a shorter tenure when refinancing?

Ans: It depends on your financial goal. A shorter tenure saves more total interest but raises your EMI. A longer tenure lowers the EMI but increases total interest, so only pick it if your monthly budget is tight.

9. Can I just ask my current bank to lower my interest rate?

Ans: Yes, and you should try this first. If your lender matches a competitor’s rate, you avoid foreclosure charges, processing fees, and a new hard inquiry.