Here’s an underappreciated truth. The amount you owe and the cost of owing it are two separate things. You might not be able to wish away a balance, but the interest rate stapled to that balance is not handed down by fate. It’s a number that can be renegotiated, which is what happens when you refinance.
Refinancing can ease debt repayment by making payments more manageable and lowering your interest costs. But it is not a magic wand. Used incorrectly, refinancing can easily cause more problems than it solves.
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- Learn how refinancing can lower your interest costs without extending your debt.
- Discover the hidden fees and loan terms that can turn a good deal into a costly mistake.
- Find out when refinancing makes financial sense, and when it simply delays becoming debt-free.
What refinancing means
When you refinance, you are taking out new debt to pay off the old debt. A consolidation loan specifically replaces several smaller debts with a new, larger one. Generally, you want the new debt to have a lower interest rate, but the payment and payoff schedule are also factors to consider.
It’s worth pointing out that lenders may try to make refinancing sound sexier than it is. The language of fresh starts and financial freedom can be motivating, but ultimately refinancing is a math problem. You must run the numbers and decide for yourself: Will this save you money or help you repay your balances?
To be clear, those are two separate questions with potentially different answers. A refinancing offer can have a lower interest rate and a lower payment but still cost you more over time.
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How lower rates, lower payments help you
A lower interest rate can reduce your total interest costs and a lower payment eases the monthly burden of debt paydown. Ideally, you get both benefits when you refinance, but there are nuances to understand:
- Lenders can manufacture lower monthly payments by extending your repayment timeline, say, from five years to 10 years. This increases your total interest costs.
- Lower interest rates are often available by refinancing unsecured debt as secured debt. Credit card debt is unsecured — there’s no collateral. Home equity debt is secured by your home. If you don’t pay, the lender can foreclose. Every situation is unique but consider carefully before you lock in a low rate by putting your home or another asset on the line.
- A “lower rate” on a consolidation loan is lower than your weighted average loan rate. Use an online calculator to determine your weighted average loan rate.
- New loans may incur fees that outweigh the benefits of a lower rate. Lenders may add your upfront fees to the loan balance, so you end up paying interest on them over time. A $50,000 loan with a 4% origination fee turns into a $52,000 loan; you get the $50,000 to repay credit cards and the lender pockets the $2,000 fee.
- Early repayment fees prevent you from paying off your debt early. Protect your right to repay debt early. You never know when your cash situation will change for the better.
- There are convenience and psychological advantages to swapping out many payments for one. This is why many people choose to refinance with easy apply personal loans, taking several scattered high-rate balances and collapsing them into one manageable payment with one due date.
Refinance examples
The table below shows how interest rate, monthly repayment, and the repayment timeline can affect total interest costs.
| Factor | Original Debt | Refinance Option 1 | Refinance Option 2 |
| Upfront fees added to loan balance | None | 4% | 2% |
| Balance | $50,000 | $52,000 | $51,000 |
| Interest rate | 21% | 15% | 8% |
| Monthly payment | $1,000 | $933 | $374 |
| Repayment timeline | 10 years | 8 years | 30 years |
| Total interest | $69,862 | $37,583 | $83,719 |
| Collateral | None | None | Home |
Refinance Option 1 offers a lower rate, lower payment, shorter timeline, and lower total interest costs. That’s what you want. Refinance Option 2 provides a radically lower payment, longer timeline, and more than double the interest costs. That’s counterproductive to your financial health. You’ll be in debt longer and spend a lot more in the repayment process.
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When refinancing backfires
Refinancing goes wrong in predictable ways.
- You opt for a lower payment with an extended term. You spend more over time on interest and remain in debt for longer.
- You pay high fees to refinance. The net benefit of the new loan is marginal as a result.
- You consolidate credit card bills into a fixed loan and then continue charging. If you have a problem with spending, get that under control first, then refinance the debt.
Pros of refinancing
- Simplifies your payment process
- Lowers your payment
- Lowers your interest costs
- Gives you a realistic path to becoming debt-free
Cons of refinancing
- Does not fix an unbalanced budget or address a spending problem
- High fees can offset the benefits of a lower rate
- Lower payments paired with longer terms cost you more and keep you indebted longer
- Repaying credit cards leaves those accounts open for more spending
The Budget Fashionista takeaways
Refinancing high-rate debt can be a smart move with two caveats. One, you must run the numbers, fees and all, to confirm the new plan will save you money. And two, you must commit to shopping with your debit card so you don’t rebuild the balances you just paid off. While the interest rate is negotiable, the follow-through is up to you.