This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

7 drawbacks of refinancing your debt





Refinancing is sometimes pitched as if it were a miracle cure for debt woes. But while refinancing can lower your interest rate and make your obligations more manageable, the FDIC recently reminded consumers that refinancing can also turn into a costly mistake in the long run.

Mortgage refinancing is the most widely known form of refinancing, but you can also refinance credit card debt, car loans and even student loan debt. The question is, should you? That answer depends on how the benefits compare with the potential pitfalls.

"Refinancing a personal loan may save you money, especially if you get a lower interest rate, a lower monthly payment or other benefits," said Susan Boenau, chief of the FDIC's Consumer Affairs Section, in the FDIC's written statement. "However, refinancing does not always equate to saving money or better terms."

The downsides of new loans

Here are some of the potential costs noted in the FDIC newsletter and how they can work against your money-saving efforts.

  1. Hidden long-term costs. Sometimes the perceived benefits of refinancing are only temporary. For example, zero percent balance transfer offers on credit cards may temporarily reduce your interest, but since those offers only last a limited time, you need to be careful that you do not end up paying a higher rate in the long run.
  2. Impact on your credit score. Speaking of credit cards, you need to take care in how you manage the opening and closing of accounts. Opening too many new accounts could weaken your credit score, as could closing an old account on which you have established a reliable payment history. If shifting balances around leads you to opening and closing accounts in such a way that it lowers your credit score, then you could end up paying a higher interest rate. That could defeat the purpose of shifting balances around in the first place.
  3. Different interest tiers. Another hazard of balance transfer offers is that those credit cards often charge a different rate for new purchases than for transferred balances. If you make only partial payments toward your balance, the credit card company has discretion over whether to apply that against new purchases or an existing balance, and they are likely to apply your payments against lower-interest debt first.
  4. More years of interest. When it comes to loans, an easy way to lower your monthly payment is to spread the remaining loan balance over more years. Before you do this though, look at an amortization schedule to see the impact a longer loan will have on the total interest you pay. This strategy can prove expensive over time.
  5. Prepayment penalties. Before you refinance any loan, be sure to check the prepayment penalties on your existing loan. They may negate the benefit of lowering your interest rate, but they may be avoidable if you wait a little longer to refinance.
  6. Transfer fees. The catch behind many zero percent balance transfer offers is that there is an upfront fee for making the transfer. Be sure you check for this and factor it into your cost/benefit calculation.
  7. Loss of federal student loan benefits. If you refinance a government-backed student loan with one from a private lender, you may lose certain government benefits, such as income-based payment options.

Remember, financial tactics like refinancing are neither good nor bad -- their value comes down to the numbers. So make sure you have looked at those numbers from every angle before you opt for a new loan.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG

Markets

DOW 17,712.66 +34.43 0.19%
S&P 500 2,061.02 +4.87 0.24%
NASDAQ 4,891.2190 +27.8570 0.57%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs