The Truth About Debt Consolidation And Refinancing


Have you ever received a call or a letter in the mail saying, “We can lower your debt payment (student loans, credit cards, etc.) from x to x, give us a call to talk”? Then you are thinking to yourself, “Lower my payments, thank goodness that sounds great!”

Before you decide to consolidate/refinance any student loans or debt, here are several things you need to consider. The reason I wrote this post is because in the past 2 weeks I have had 3 questions about this topic.

What is debt consolidation?

Debt consolidation is when you take many loans and put it into one loan. The goal is to simplify all of your different payments into one.

What is debt refinancing?

Debt refinancing is when you replace a loan (or multiple loans) with one loan, the goal is to get a lower interest rate which will give you a lower monthly payment.

Many times banks and consolidation companies do a consolidation and a refinance at the same time.

Here is an example:

Let’s say you have $30,000 in debt (student loans, credit cards, etc.) one loan is a 2 year loan for 10k at 12% interest, the other is a 20k loan for 4 years at 10%. On this $30,000 in debt, your total monthly payment is $1,100 per month.

The consolidation company would contact you and say instead of paying $1,100 per month they can lower your monthly payments to $650 and put your interest rate at 9% for all of your debt. (Consolidate and Refinance)

What happens is they extend your loan payments out to 6 years (longer then initially had) and lower your monthly payment. In the long run you pay more in interest because now the debt is not a 2 or 4 year loan, it is a 6 year loan.

Now, you have one lower monthly payment but you are paying back more money for longer.

The average college graduate

The average graduate has $37,000 in student loan debt, which is about $400 per month in minimum payments. In my opinion, if you are in the average bucket, you do not need debt consolidation or refinancing.

How can you get out of debt without consolidation or refinancing?

I created this FREE course specifically for people who want to get out of debt and need a guide to get it done. It include a spreadsheet to organize your debt, two strategies to pick from to get rid of debt, and a budget to keep you on track each month.

If you want to see what refinancing would look like, the only company I would look at is LendEdu because it is a soft credit pull and they give you options before you sign up for anything.

Another thing to consider

For some jobs, like teaching, some counties will give you a credit towards your student loans after working 3-5 years in the same county. If you consolidate your student loans, you could potentially lose any credits that you may be eligible for down the line.

If you are considering a consolidation/refinance always make sure it aligns with your goals. For some people, they may need to lower their monthly payments and extend out their payments because of a unique situation, which is understandable. However, don’t just jump for something because it will lower your monthly payments, do your research and make sure it is a good decision.

Have you consolidated or refinanced debt before?
What are your thoughts?
How did it work out?