Debt consolidation and refinancing are two ways to restructure your debt. Consolidation refers to borrowing a lump sum to pay off your debt, thus combining many balances into one. Refinancing is using a new loan or line of credit to pay off existing debt while changing the contract terms in some way, such as lowering the interest rate.
If you’re considering either of these options, here are some steps to take as you prepare:
Step #1. Compare Credit Line and Loan Options for Unsecured Debt
For unsecured debt—that which is not backed by collateral, like the kind that comes from credit cards—consolidation or refinancing could help you pay off what you owe faster. There are several strategies worth comparing.
Balance transfers: Some credit cards offer promotions wherein new cardholders pay 0% APR (annual percentage rate of interest) on balances transferred to the card within a certain timeframe. Using this method, you could combine outstanding balances from multiple credit cards onto one, meaning you’d only have one monthly payment to keep up with. Even better, the interest savings could give you an opportunity to make a meaningful dent in the principal—or even pay off the balance entirely.
Be mindful that after the zero-interest introductory period, the APR increases to the standard rate for the card, which could be quite high. To make the most of this credit card payoff strategy, focus on aggressively reducing the balance before interest kicks in and avoid adding new charges. Also be aware that the credit card issuer might charge a fee to process your transfer. Ultimately, for the transfer to be cost-effective, the interest savings has to be enough to justify the fee.
Installment loans: A fixed-interest installment loan can be a solution for borrowers who need more than a year or two to pay off unsecured debt. With this type of loan, you agree to borrow a specific amount, and both your monthly payment and interest rate are fixed at the start. Many borrowers like this option because it gives them a clear end in sight for paying off their debt.
For people who qualify, a personal installment loan might also offer a lower interest rate. The average credit card APR is 21.47%; in comparison, the average APR for a 24-month personal loan is 12.32%.1
Home equity products: Homeowners may consider accessing their home equity through a Home Equity Line of Credit (HELOC) or Home Equity Loan, which allows them to borrow against the value of their property. Home equity MAY offer lower interest rates than unsecured credit products, as they're secured by property. Depending on one's financial situation, these products can be used to tackle higher-interest debt, such as credit cards. The risk of using these options, though, is that you could lose your home if you default. Before taking out any loan, be sure to read the terms and conditions so you know your obligations and risks.
Step #2. Understand the Fees Involved
No matter which product or method you use to restructure your debt, there are usually fees to consider.
Credit card issuers may charge a percentage-based fee for each balance you transfer to a new card. Personal loans, home equity lines of credit and home equity loans may have upfront fees as well.
Refinancing a long-term secured loan, such as a car loan or mortgage, can also require application and origination fees. Closing costs for a mortgage refinance can be several thousand dollars when you add up lender fees, appraisal fees, title fees and more.
Whether it makes financial sense to refinance a mortgage depends on how long you plan to stay in the home. If you move too soon, the savings might not cover the cost. The time at which your monthly savings cover the cost of refinancing is called the "break-even point."
For example, if you save $250 per month from refinancing and the refinance costs you $4,000 in fees, it would take 16 months to break even. If you move out of the home before then, the refinance may not be worthwhile.
Step #3. Review the Total Cost (and Not Just the Monthly Payment)
Whenever you consolidate or refinance debt, look beyond the monthly payment to the total loan cost, especially for car loans. Refinancing a car loan could be tempting if it lowers your monthly payment obligation, but that reduction might not lead to long-term savings. In fact, you could end up paying more if interest payments extend over a longer loan term.
Next Steps
Debt consolidation or refinancing can combine your debt and possibly lower your payment. To find the best deal on a new product, consider options from multiple lenders since each can offer different interest rates, terms and fees. After combining your debt into one payment, think about setting up automatic payments so you have one less bill to remember.
Footnotes:
1 The Federal Reserve. "Consumer Credit - G.19." Available at https://www.federalreserve.gov/releases/g19/current/. Accessed on JFebruary 10,2025.
