Can I Refinance My Debt?

Debt is part of life for many Americans. Whether it’s to pay for our cars, our houses or even our monthly grocery expenses, we’re used to borrowing money. In fact, in 2020, the average consumer in America had a debt balance of almost $93,000.

When you owe that much, lowering your interest rate even one percent can lead to significant savings. One way to do that is with a refinance. This guide will show you how to determine whether you can refinance your debt and when it would be worthwhile.

What is debt refinancing?

Debt refinancing is when a consumer takes on new debt, uses the proceeds to pay off an older balance and then makes periodic payments on the new account.

People usually initiate refinances to get a loan with a better interest rate than the one they already have, either because they’ve improved their credit score or because the Federal Reserve has lowered the prime rate, making borrowing more affordable.

Successful debt refinances can create significant savings. For example, if you took a 30-year fixed mortgage of $300,000 with an interest rate of 4%, you’d pay $215,608.52 in interest over the life of the loan — $64,175.97 would accrue in the final 15 years of the loan.

However, if you refinanced the original loan halfway through its term using a 15-year mortgage with an interest rate of 3%, you’d pay just $47,060.79 over the same period. That would save you $17,115.18 in interest.

The primary obstacles to debt refinancing

You can find a lender to refinance most types of debt these days. That said, just because you can refinance your debt doesn’t necessarily mean that you should. Many things can reduce or negate the potential benefits, such as:

• Prepayment fees: Lenders lose money if you pay off your balance before interest can accrue. They may minimize potential losses with charges that are triggered if you pay in advance or refinance.

• Closing costs: Completing significant transactions often costs money and refinances aren’t an exception. These costs could include origination fees, balance transfer fees, title fees and more.

• Interest rates: You’re not guaranteed lower interest rates just for holding an account open. You’ll need to work to improve your credit score or get lucky with a decreased prime rate to access savings.

• Loan terms: Refinances can reset your loan term, which gives interest more time to accrue. Try to avoid refinancing at a lower rate only to extend your time in debt and end up paying extra interest.

The most successful refinances cost the least in fees and save the most in interest. Both of those variables are affected by your credit score, the current offers on the market and the type of debt you refinance.

What are the 4 types of loans, and can I refinance them?

There are four fundamental types of consumer loans: housing, auto, personal and student loans. You can refinance each of them, but they all present different combinations of the challenges above.

Mortgage

Mortgage loans have such high balances and long repayment terms that refinancing can make a lot of sense. That’s why there are so many types of refinance loans for mortgages — like cash-out loans, rate-and-term loans and cash-in loans.

Unfortunately, their closing costs can be significant. If your $200,000 refinance costs just 4% in fees, you’d have to save more than $8,000 in interest to make it worthwhile.

Auto

Auto loans operate on a much smaller scale than mortgages, but they have a much wider variation between their interest rates. Their high potential for rate savings plus generally low closing costs can make auto refinances very profitable.

Unfortunately, auto loans are more likely to have prepayment fees than mortgages. Be careful not to book a refinance and end up losing money due to a surprise prepayment fee.

Personal

Personal loans are the most flexible type of loan, so few rules apply to all of them. You’ll need to check the specific terms for your accounts and run the numbers to assess your options.

Student

Student loan refinance rules differ between private and federal loans. Private student loans are similar to personal loans — you’ll need to see real offers to make any meaningful plans for them. 

If you refinance a federal student loan into a private one, you’ll be giving up benefits like temporary forbearances of interest and income-driven repayment plans. It’s not usually a good idea, even if it were to lower your interest rate.

How do credit cards play into refinancing?

Credit cards are revolving debt and not installment debt. You won’t owe interest on balances as long as you pay them off before their, typically, month-long grace period. There’s no repayment schedule, and you can reuse the line again and again.

Ideally, you shouldn’t let your credit card balances accrue interest — credit cards often charge a higher interest rate than personal loans. However, if you get overextended, lose a portion of your income and expect not to pay off your credit card debt for a while, a refinance might be a good idea. 

You can also refinance other debts into a credit card. That’s an aggressive strategy that involves a balance transfer to a card with a temporary promotional 0% interest period.

When to refinance your debt

Some math is required to figure out whether you should refinance to pay off debt: Calculate the potential interest savings, add up the cost of any expenses you would incur and compare the two. If you would end up saving money with a refinance, it might be a good idea. 

Of course, it’s not always that simple in practice. You should probably compare the savings of a refinance vs paying extra toward the loan. There are also other potential considerations, like how long you plan to live in a house or drive a car that’s attached to your loan.

You’ll need to figure out each of the possible options, calculate their relative cost savings and choose the one that’s most likely to keep the most money in your pocket.

Are you considering refinancing to save money and get out of debt as soon as possible? Consider Tally. Tally is a credit card repayment app that offers a lower-interest line of credit† that can help you pay down your debt efficiently.

​​†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate.