Financial experts often tout refinancing and consolidation as a great way to help pay off debt, but is refinancing your debt always the best choice? Today we’ll go over specific types of debt and how you can determine whether or not it’s in your best interest to refinance those debts into another loan.
Each type of debt will have a different answer, as there are different scenarios and rules for refinancing different types of debts. This article will discuss four of the most common debts people consider refinancing.
RELATED: Student loan guide
Student loan debt
Is it a good idea to refinance student loan debt? Honestly, it depends on your current student loan debt situation. Most people should not refinance their student loan debt, simply because the interest rate on many student loans is incredibly low and the options for repayment under the federal student loan program are very generous.
For instance, undergraduate students can currently get both subsidized and unsubsidized Stafford loans for an interest rate of 3.76%.
PLUS loans, while nearly double that rate (a rate of 6.31% at this writing), are still at a lower rate than most private student loans.
Private student loans are a whole other matter. Not only do the available interest rates on private student loans tend to fluctuate wildly, private student loans often can’t be written off in a bankruptcy situation. If you’re holding private student loans, you may want to consider refinancing them with a company like SoFi that often has lower, fixed rate loan options available. SoFi has a new option, backed by Fannie Mae, which allows you to refinance your mortgage while paying off your student loans. It is certainly worth looking at if you qualify for that option.
For more info on smart student loan borrowing, check out our Student Loan Guide.
Car loan debt
There are many great reasons to buy a car with cash, but in the event that you’ve chosen to get a car loan, you may be better off refinancing it. When searching for the best car loan rates, it’s always a smart idea to check with local credit unions, since their primary goal is to service their clients and not to make a profit. Many credit unions have rates as low as 1.49% right now on short term car loans!
Sites such as Bankrate can be another good source for finding the best rate for refinancing your car loan, as auto loan rates can fluctuate vastly between lending companies both locally and around the country.
When deciding whether or not refinancing your auto loan is a smart move, check to be sure the rate on the new loan is at least a half a percent lower than your current loan rate; that there are no costs for refinancing; and that the term of the new loan is consistent with (or less than) the number of months left on your current auto loan.
Credit card debt
Credit card debt is one of the most common types of debt that people consider refinancing, and it is almost always a smart move to look into refinancing credit card debt if you are paying interest on the debt. An exception to this is if you are refinancing credit card debt into your mortgage. Getting hounded by creditors is one thing, but losing your house because you can’t pay is much worse.
For most people there are many credit card offers available that will allow you to transfer your credit card balance to a zero percent interest card and with little or no balance transfer fees. Though if you’ve got a low credit score or bad marks on your credit report, these kinds of special offers might be hard to come by.
The less interest you’re paying on credit card balances, the faster you’ll be able to gain traction to pay the balances off completely.
For a list of the latest awesome credit card balance transfer options, click on this link.
As with most other types of loans, it’s a smart idea to check into whether or not any personal loans you have can be refinanced into a lower rate loan vehicle. Again, cost of the loan is key (most personal loan refinances don’t cost anything but it’s always a smart move to verify that). You’ll also want to ensure that the remaining term of the loan won’t be extended as that means you’ll pay more interest over time.
Companies such as SoFi, Prosper, Lending Tree and Discover are good companies to check out when comparing interest rates on personal loans, as is your local credit union.
A word about mortgage refinancing
If you’re carrying a mortgage that has an interest rate of 5% or more, now is the time to consider refinancing that mortgage, provided you’ll be carrying the loan for more than five years. Mortgage rates are still near historical lows and there is much cash to be saved by checking out your mortgage loan refinance options if you’re paying a higher rate.
When looking at mortgage refinancing options, closing cost numbers and APRs are key. Many companies charge astronomical closing costs, while others claim a “no cost” loan and then work the closing costs into the loan via a higher interest rate.
It’s smart to read the fine print and do a lot of comparison shopping before choosing a lender for your mortgage refinance.
RELATED: How to refinance your student loans