Overlooked Secret of Refinancing Debt

Going into debt to buy the things we need has unfortunately become a modern way of living. However, debt doesn’t have to be financially crippling. The trick is in learning how to work with your money and with creditors to find the deals that work best for your personal situation and timelines.

What may have seemed like a reasonable financial solution at one point may not stand the test of time and that’s okay. You may need to make changes, so learning how to refinance debt that you already have can make life not only easier, but also less expensive while actually saving you money.

How Does Refinancing Debt Work?

The concept of refinancing is really very simple. You have debt. You owe money, probably to multiple creditors. Owing money costs you more money. Those additional costs usually come in the form of interest and fees that the creditor charges you in addition to the actual money borrowed. The creditor can charge these fees because they’re willing to wait for repayment and accept partial payments over time.

If you have multiple debts or debts that carry high fees or interest rates, those conditions can make repayment of the original debt difficult; especially if another financially demanding situation comes along.

The solution is often to refinance or find another lender or program that will help you manage it all and, more importantly, will save you money over time. To refinance a debt, you take out a new loan to replace the old. You can refinance one sizable debt with a new loan, or you can refinance multiple debts and consolidate them all into one new loan. You just need to be certain that the terms and conditions for the new loan are better than the old ones. The most commonly used tools to do this are personal loans and credit cards.

• Personal loans can be secured by collateral or be unsecured, with no requirement for collateral. The new personal loan pays off the previous debt or debts and allows you to repay what you borrowed with one monthly payment that typically remains the same until the loan is repaid in full.
• Credit cards are unsecured debt, and while credit cards may be what caused your debt issues in the first place, the right offer may now help you remedy your situation. Many credit cards offer low-interest balance transfers and low- or zero-interest introductory promotional periods. Often, they’ll give you a year to pay down principal with little to no interest. Even if you aren’t able to pay off the whole sum, you have the opportunity to whittle down the amount accruing interest.

Both are reasonable options with certain advantages. If you’d like to see how the costs of a refinance might actually play out against staying the course, we’re ready to walk you through a pretty common example with various options.

Refinancing by the Numbers 

Forbes Advisor’s weekly credit card report for July 2024 lists the average credit card interest rate as 27.70 percent. According to the U.S. Federal Reserve, the average interest rate in February on credit cards with balances was 22.63 percent. We’re starting here because this is the type of debt that most people struggle with and often need to refinance.

Although age groups vary in their credit card use, the average American household carries somewhere between $3,000 and more than $8,000 in credit card debt. So, let’s say that you have $3,000 on one card and $3,500 on a second. The interest rate on the first is at just 20 percent while the one on the second has crept up to 23%. If you use a credit card calculator, you can work out various scenarios.

For the first example, you’ve decided you can pay $200 a month toward each card.

• For the first card with the $3,000 balance, you’ll pay it off in one year and six months. The total interest paid would be $480.87.
• If you did the same for the second card with the $3,500 balance, paying $200 a month, you would pay it off in one year and 10 months and pay $804.33 in total interest.
• Together, to pay off $6,500, you will have paid nearly $1,300 in interest in less than two years.

To change the scenario a bit, you might try to pay them both off over the course of two years.

• For the $3,000 balance, you’d need to pay $152.69 each month, and at payoff, you will have paid $664.50 in interest.
• For the $3,500 balance, you’d need to pay $183.31 each month, and at payoff, you will have paid $899.36 in interest.
• Together, to pay off $6,500, you will have paid well over $1,500 in interest—$1,563.86.

You may decide you can only pay $150 to each account each month.

• You’d pay the $3,000 balance off in two years and one month, but it will cost you $679.51 in interest.
• You’d pay the $3,500 balance off in two years and eight months, but it will cost you $1,183.62.
• Together, to pay off $6,500 in $150 increments, you will have paid more than $1,800 in interest.

Now, let’s say you refinance those amounts into one personal loan for $6,500 at the current national average interest rate of 12.35 percent.

• If you choose a term of 24 months, as in the above examples, you could pay just $307.04 each month, and your total interest paid would be just 868.99.
• If you chose to extend the term to 36 months (three years) your payments would be just $216.98, and your total interest paid would be $1,311.32.

If you were to do a zero-interest balance transfer to a credit card. You could pay down the balance for a year interest free.

• If you decided to pay half of the $6,500 (or $3,250) over the course of that year, you would pay $270.83 each month.
• If you rounded the payment up to $300 each month, you’d have paid off half of $3,250 in just 11 months and have another month to go even further.
• If you were really aggressive and wanted to pay off the whole $6,500 in one-year, monthly payments of $541.67 would do it. That’s not that much more than the original $200 a month for each account that we began with but a whole lot less paid out in interest.

Important note: You do want to make sure that the interest rate that kicks in at the end of the promotional period is a reasonable one because you will have to pay interest on whatever balance remains according to the account’s terms and conditions.

Financial Tools to Refinance Your Debt

Personal Loans

La Cap’s personal loans, also called signature loans, offer a convenient way to use one financial tool to combine multiple debts and simultaneously conquer high interest rates with one low reasonable annual percentage rate. Instead of trying to track multiple bills, variable interest rates that keep climbing, and assorted due dates, you can have just one monthly bill.

We currently offer flexible terms and with an APR as low as 11.49%* with no collateral. You can borrow as little as $1,001 to $2,500 for 24 months, $15,000 or more and finance it over 60 months, or a figure and term somewhere in between. Our personal loans are a practical way to end the seemingly endless struggle and consistently pay off debt.

Credit Cards

The right credit card can also be a valuable financial tool in refinancing debt — particularly if it comes with an attractive introductory offer of zero-percent interest for a year. At La Capitol Federal Credit Union, you have not one but three options to choose from.

• La Cap’s Cash Back Visa Signature offers zero interest on balance transfers for 12 months¹  , zero interest on new purchases for 12 months¹   and a $150 bonus for using your card for qualifying purchases in the first 90 days.² Plus, you get 1% back on all new purchases,³ so you’ll earn with every use.
• La Cap’s Prime Plus Visa also offers zero interest on balance transfers for 12 months¹ and 1.99% on all new purchases for 12 months.¹ After the introductory period, the Prime Plus Visa features an interest rate that may be as low as 11.5% APR.¹
• La Cap’s Rewards Visa also offers zero interest on balance transfers for 12 months¹ and 1.99% on all new purchases for 12 months.¹ As a reward, you’ll get one point for every dollar spent that you can use toward travel, merchandise and more through CU Rewards.

All three cards come with no annual fees and no over-the-limit fees. Used responsibly, cards with super-low interest rates on balance transfers and new purchases may give you the financial breathing space you need.

Save More with La Capitol

Now that you understand how debt consolidation works and the financial tools available, you’re probably wondering how you might refinance your own debt. At La Capitol Federal Credit Union, we’ve helped scores of our credit union members learn how to manage their finances and pay down their debt.

Whether you’re interested in a lower-interest personal loan or a more versatile credit card, we’re ready to help. You don’t have to struggle against debt. Reach out today, and we’ll get started on how to help you save the most on your financial journey.

Disclosures

* Membership required. To receive loan proceeds Regular Share Account with a $5.00 par balance is required. APR = Annual Percentage Rate. 11.49% APR is the lowest rate available for the advertised product. Minimum loan amount is $1001.00. Loan approval, rates, and terms are based on certain credit criteria and worthiness not everyone will qualify for the lowest rate available. The maximum term of payment available is 60 months. The maximum rate for a La Cap personal loan is 18% APR. Payment Example: A loan amount of $9,000 for 48 months at 11.49% APR has an estimated monthly payment of $234.76. Adding payment protection may change the rate, payment, and term. Any deferment of payment(s) during the life of the loan may result in an increased APR for the statement cycle(s) of the deferred payments. Offer valid for unsecured loans only and cannot be combined with any other offer. Other restrictions may apply. Contact a La Cap representative for details.

1 APR = Annual Percentage Rate. With Prime Plus and Rewards Visa’s the introductory APR of 1.99% for 12 billing cycles on eligible purchases made in the first 90-days from account opening. With Cash Back Visa, the introductory APR of 0.00% for billing cycles on eligible purchases made in the first 90-days from account opening. The introductory APR on balance transfers made in the first 90-days from account opening is 0.00% for 12 billing cycles. Cash advances are not eligible for either introductory rate. After that the variable rate as of 09/01/2023 will be (11.50%-18.00% Prime Plus) (15.50%-18.00% Signature Cash Back) (15.50%-18.00% Rewards) based on your creditworthiness. Existing La Capitol credit card balances or loan accounts are excluded from this 0.00% balance transfer offer. Membership required and membership account with $5 par required for additional services. Additional restrictions may apply please contact a La Cap representative for complete details.

2 You will be eligible to earn a $150 bonus when you spend at least $1,500 in eligible net purchases within 90-days of from opening your new Visa Signature Cash Back. The purchase requirements and exclusions that apply to cash back rewards also apply to the bonus. This applies to new La Capitol Visa Signature Cash Back accounts only. Additional restrictions may apply please contact a La Cap representative for complete details.

3 Earn a 1.00% rebate based on net purchases. "Net purchases" means the sum of your eligible purchase transactions minus returns and refunds. Eligible purchase transactions do not include, and rewards are not earned for, the following transactions: cash advances, convenience checks, balance transfers, gambling, or fees of any kind, including finance charges, late fees, returned check fees, and ATM transaction fees. Cash equivalent transactions, such as the purchase, loading, or reloading of gift and prepaid cards. Additional restrictions may apply please contact a La Cap representative for complete details.