Refinancing or rolling over a loan changes how an existing debt is repaid. It rarely removes the debt. In most cases the old balance is carried into a new agreement, interest runs for longer and only part of the new credit reaches your bank account.
Five figures show what is really happening: the amount still owed, the cost of settling the existing agreement, the new cash you receive, the total repayable under the new agreement and the extra time spent in debt.
A smaller repayment does not necessarily mean a cheaper loan.
The amount described as the new loan is not the amount paid into your bank account. Only the green segment reaches you. The whole block, plus interest, is what you repay.
What does refinancing a loan mean?
Refinancing means changing or replacing existing credit so that repayment continues under new terms.
In a common refinance, the balance of an existing loan is included in a new loan. The old agreement is closed and the borrower starts making payments under the new agreement.
The new borrowing may only cover the old balance, or it may include extra money for the borrower to use.
For example, a borrower might owe £700 on an existing loan and refinance an existing loan into a new loan of £1,000. Part of the new loan clears the old balance. The borrower receives the remaining amount, less anything else included in the calculation.
The borrower has not received £1,000 in usable cash. Most of it has been used to replace money they already owed.
What does rolling over a loan mean?
Rolling over usually means extending the time allowed to repay a loan.
Instead of paying the amount on the original due date, the lender moves the payment to a later date or replaces the agreement with a longer one. Further interest or costs may apply.
The terms “rollover”, “renewal”, “extension”, “top up loan” and “refinance” are sometimes used differently by different lenders. What matters is what happens to:
The old balance.
The repayment date.
The interest.
The total repayable.
The amount of new cash received.
The length of the agreement.
Read the figures rather than relying on the product name.
Refinancing, rolling over and lender support are not identical
These descriptions show common arrangements. The lender’s agreement and written explanation determine what is actually being offered.
Why a lower monthly payment can cost more
A refinance often looks attractive because the new monthly repayment is lower.
The payment may fall because the new debt is spread over more months. The borrower gets more time, but interest may be charged throughout the longer term. Choosing the Right Repayment Term explains how term length changes the total cost of any loan.
Keep the existing agreement
Three repayments of £220 remain.
Refinance
The old balance is replaced and the borrower receives £300 in additional cash. The new agreement requires ten repayments of £125.
The £125 payment is easier to manage than £220. However, the borrower remains in debt for longer and will pay £1,250 under the new agreement.
Compare your current loan with the proposed refinance
Enter the figures from your current agreement and the lender’s proposal. The tool works only with what you type.
Illustrative example
Representative example: Borrowing £1,000 over 18 months with an annual interest rate of 59.97% fixed, you would make 18 monthly repayments of £89.22. The total amount repayable would be £1,605.96. The total interest charged would be £605.96. Representative 79.5% APR variable.
This tool compares figures entered by you. It does not check an agreement, include unknown costs or recommend refinancing. Use the documents supplied by the lender. No information is saved or transmitted.
The number most people miss
The most easily overlooked figure is the amount of cash actually received.
A refinancing offer might describe £1,500 of new credit. If £1,100 is used to clear the old loan, only £400 may reach the borrower before any other adjustments.
The borrower will make repayments based on the new agreement, not only the £400 they can spend.
Before accepting, write down:
A lender should explain these figures clearly. Ask questions if the amount received and the amount owed appear too far apart.
What FCA rules say about refinancing
A lender must not encourage a customer to refinance regulated credit if the resulting commitments would be unsustainable. The rules are in FCA CONC 6.7.
When a lender refinances its own existing credit, other than as an exercise of forbearance, the customer must request or consent to it. The lender must also reasonably believe that refinancing is not against the customer’s best interests.
These rules do not mean every refinance will be suitable or affordable. The borrower should still assess the new commitment using their income, essential spending and existing debts. If you believe a loan or refinance was unaffordable when it was agreed, the Financial Ombudsman Service explains how it looks at unaffordable lending complaints.
Special rules for high cost short term credit
Rollovers are restricted
High cost short term lenders must follow additional refinancing rules under FCA CONC 6.7. The FCA describes this type of borrowing in its guide to high cost credit and payday loans.
Before agreeing to refinance this type of credit, the lender must provide a prescribed information sheet. The warning explains that a payday loan rollover or extension may make the situation worse and directs the borrower towards free debt advice.
A high cost short term loan must not generally be refinanced more than twice. This limit does not include a qualifying exercise of forbearance.
The lender should not refinance where doing so would be unsustainable or otherwise harmful. MoneyHelper’s payday loan guide explains what to check before extending one.
The two refinance limit applies to high cost short term credit. It is not a rule that every personal loan can only be refinanced twice.
Refinancing and forbearance
Someone who cannot afford a repayment does not always need another loan.
Forbearance is support offered when a customer is experiencing or approaching financial difficulty. It may involve a changed repayment plan, more time to pay or reduced payments.
Under the FCA’s specific refinancing rules, an arrangement counts as exercising forbearance where no interest accrues from the refinancing date and no charge applies, apart from a permitted reasonable administrative cost.
The everyday use of the word forbearance can be wider, so the borrower should always ask for the exact effect of an arrangement.
Ask the lender:
Is this new borrowing or a support arrangement?
Will interest continue?
Are charges being added?
Will the total amount owed increase?
How will it appear on my credit file?
What happens when the arrangement ends?
Refinancing versus a separate loan
A refinance combines or replaces existing borrowing. A separate or concurrent loan leaves the first agreement running while a second one begins.
A separate loan may avoid extending the original agreement, but it creates two repayments at the same time. That can place greater pressure on the monthly budget.
The FCA has found in its review of relending by high cost lenders that refinancing can cost more overall than running concurrent loans because refinancing can extend the term and charge further interest on the original borrowing.
This does not mean taking a second loan is the better choice. Two simultaneous repayments may be unaffordable even where the eventual total is lower.
Compare affordability and total cost. Do not judge only by the first monthly repayment. Understanding APR and the Total Cost of a Loan shows how to compare the whole cost rather than the headline figure.
Check for settlement amounts and added costs
When the old loan is closed during refinancing, ask for a clear account of the balance used.
The FCA has criticised practices where customers were encouraged to give an unnecessary early settlement notice so that extra interest could be included in the refinanced balance.
Do not assume every settlement amount is wrong. Ask the lender to explain:
The old loan balance.
The settlement figure used.
Any interest included.
Any fees or charges added.
The amount carried into the new agreement.
The amount paid directly to you.
Can You Repay a Loan Early? explains how a settlement figure is calculated and what you are entitled to ask for.
Could refinancing affect your credit file?
Refinancing may involve a new creditworthiness assessment and a new credit agreement. A full application may leave a hard search on your credit file.
The old account may be shown as settled and the new account may appear separately. If the refinance follows missed payments, accurate payment history may remain visible.
Refinancing does not erase previous arrears or repair a credit score. It should never be promoted as a way to clean a credit file. This applies whether you are refinancing with bad credit or a strong credit history.
Check whether an eligibility assessment uses a soft or hard search before continuing. Soft Search vs Hard Search Explained covers the difference.
Questions to ask before accepting
- 01Why am I refinancing?
- 02How much of the new loan will I actually receive?
- 03What happens to my existing loan?
- 04What is the new total repayable?
- 05Is the monthly payment lower only because the term is longer?
- 06How many additional months will I be in debt?
- 07Are any fees or settlement costs being added?
- 08Is the new rate fixed or variable?
- 09Can I afford every repayment after essential costs?
- 10Would lender support or free debt advice address the problem without more borrowing?
Write the answers down. If any answer is unclear, ask the lender before signing.
Warning signs refinancing may not solve the problem
Refinancing deserves particular caution when:
New credit is needed to make the existing loan payment.
The borrower has refinanced several times already.
The new agreement provides little cash but creates a much larger balance.
The payment falls only because the term becomes much longer.
Essential bills are already being missed.
Income is not enough to meet normal living costs.
The lender focuses on available cash rather than total repayable.
The borrower expects to refinance again before the new agreement ends.
Repeated borrowing of this kind can indicate that the original borrowing is no longer sustainable.
Alternatives to taking another loan
If the reason for refinancing is payment difficulty, contact the existing lender before applying elsewhere. What Happens if You Miss a Repayment? explains what to say and what to expect.
Possible support may include:
Moving the payment date.
Allowing more time to catch up.
Agreeing reduced payments for a period.
Reducing or pausing interest or charges.
Creating an affordable repayment plan.
Referring the customer to free debt advice.
No particular option is guaranteed. Ask how any arrangement changes the total cost and credit reporting.
If several debts or priority bills are affected, use MoneyHelper’s bill prioritiser and Debt Advice Locator. Free debt advice can review the whole situation rather than treating one loan in isolation. MoneyHelper also explains when a debt consolidation loan can help and when it makes things worse.
Frequently asked questions
Not always. Refinancing often replaces or changes an existing loan under new terms. A rollover usually extends the repayment date or term. Lenders may use the words differently, so check what happens to the balance, interest and agreement.
It can, but part of the new credit is normally used to clear or replace the existing balance. The cash received may be much less than the new loan amount.
It may reduce them if the debt is spread over a longer term. The total repayable can still rise because interest is charged for longer.
Not necessarily. Compare the existing repayments still due with the new total repayable. Include the new cash received and every fee or settlement amount.
High cost short term credit must not generally be refinanced more than twice, outside a qualifying forbearance arrangement. Do not assume this rule applies to every type of personal loan.
There is no guaranteed improvement. A new application may involve a hard search and the new account may appear on the credit file. Previous accurate payment history will not normally disappear.
It may be. If the existing balance is absorbed into a new loan, it is commonly a refinance. If the old loan continues separately, it may be additional or concurrent borrowing.
Contact the lender as soon as possible. Explain what you can afford after essential costs and ask what support is available. If more than one payment or priority bill is affected, seek free debt advice before taking further credit.
Look beyond the new repayment
Refinancing can make the monthly figure smaller while increasing the total cost and extending the time spent in debt. Compare the old balance, cash received, new total repayable and new term before agreeing.
LoansForBadCreditUK.co.uk is a credit broker, not a lender. We cannot refinance an existing agreement or change its terms. Any refinancing decision, credit assessment and agreement will be made by the relevant lender.
This guide provides general information and is not personal financial or debt advice.