Debt Consolidation vs. Refinancing: Which Plan is Best for You?

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Let’s get real. Debt sucks. It sticks with you like that one friend who always needs to “borrow” five dollars. Never leaves you. Always wants more.

I remember when my credit card statements started to look like small novels. Page after page of regretful purchases. That camping gear I used once. The fancy blender that now collects dust. The “investment” in crypto my nephew promised would make me rich. Spoiler alert: it didn’t.

But here we are. In debt and looking for a way out. Two terms keep popping up: refinancing and debt consolidation. They sound like they’re complicated. Almost like you’d need a degree in finance to understand them. You don’t. Trust me.

The Debt Mess We’ve Made

Before we jump into solutions, let’s take a moment to recognize how we ended up here. Perhaps you had a crisis. Maybe you got caught up in the “buy now, pay later” buttons that sites just can’t stop putting in front of us. Or perhaps life simply occurred. Doctor bills. Car trouble. That wedding your friend just had to have in Bali.

No matter why, you’re now dealing with multiple payments, due dates, and interest rates that make you question if loan officers have souls. It’s exhausting. And expensive.

What the Heck is Debt Consolidation?

Debt consolidation is basically where you take all your multiple small debts and consolidate them into one big debt. Sort of like when you sweep all the crumbs on your counter into your hand instead of dealing with them separately.

Here’s how it works:

  1. You take out a new loan big enough to eliminate all your other debts
  2. You use it to pay off all those other little debts
  3. Now you have only one payment to make each month

Sounds simple, doesn’t it? It can be. The greatest advantage here is simplicity. One payment. One due date. One interest rate to keep track of.

But wait – there’s more! (Sorry, couldn’t resist the infomercial vibe)

If you’re able to get a lower interest rate on your consolidation loan than you were paying on average on your other debts, you’ll save money, too. Here’s where things get interesting. And by interesting, I mean potentially awesome for your wallet.

The Good Stuff About Consolidation {

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  • One payment instead of several. No more keeping track of due dates or remembering to pay that one card you only use for gas.
  • Lower interest rates, perhaps. Especially if you’re consolidating high-interest credit card debt into a personal loan.
  • Fixed repayment term. Consolidation loans usually have a set term, so you have an exact date when you will be debt-free.
  • May increase your credit score down the line if you’re paying on time and reducing credit utilization.

The Not-So-Good Stuff

  • You’ll likely be charged origination fees for the new loan. Nothing is free, especially not in finance.
  • You might pay more interest over time despite the lower rate if you take a longer repayment term.
  • You need good credit to get the best rates. Ironic, since credit score problems typically come with debt problems.
  • It doesn’t address the spending problems that got you into debt to begin with. My personal downfall was 2 AM online shopping. Nothing good happens after midnight, including Amazon purchases.

Refinancing: Not Just for Mortgages Anymore

And on to refinancing. Most folks think about refinancing in terms of home loans, but you can refinance just about any debt. Car loans. Student loans. That loan from your uncle that he won’t stop “forgetting” about until family reunions.

Refinancing means replacing an existing loan with a new one, usually on better terms. The key difference from consolidation? Refinancing usually means replacing one loan rather than combining multiple debts.

When Refinancing Makes Sense

  • Interest rates have dropped since you took out your original loan
  • Your credit score has improved, so you qualify for more appealing rates
  • When you want to change your loan term (shorter to pay less interest, longer to lower monthly payments)
  • When you want to switch from a variable to fixed rate or vice versa

Let me tell you a story about my friend Jake. He refinanced his student loans three years into his career after he had built up his credit score. Reduced his interest rate by 3%. THREE PERCENT! That’s thousands of dollars over the life of the loan. He bought everyone drinks to celebrate. Which, depending on what he was saving, was kind of financially responsible. Kind of.

The Epic Showdown: Consolidation vs. Refinancing

So which is better? It depends. (Don’t you hate that answer? Me too. But it’s true.)

Here’s a handy cheatsheet:

Consolidate if:

  • You have multiple debts with different interest rates and due dates
  • You’re having a hard time keeping track of all the payments
  • You want to simplify your financial life
  • You’re dealing mostly with high-interest debt like credit cards

Refinance if:

  • You have one large loan with less-than-ideal terms that you presently carry
  • Your credit rating has risen significantly since taking out the original loan
  • Rates have decreased across the board
  • You want to make some changes to your repayment term

Do you recall when I tried to assemble IKEA furniture without reading instructions? Choosing the incorrect debt strategy is somewhat similar. You might get something that functions, but it won’t be aesthetically pleasing and you’ll waste time and money along the way.

Real Talk: What the Banks Don’t Tell You

I’ll share something with you that most financial advisors won’t. Sometimes the best option is neither. Shocking!

If you can pay off your debt in 12-18 months with aggressive payments, the hassle of new loan applications and perhaps paying fees might not be worth it. Do the math. Always do the math.

And one last thing. Banks want to emphasize how much less your monthly payment will be. “See! You’ll save $200 a month!” What they’re whispering under their breath is “.but you’ll be paying us for 7 more years.” Don’t fall for it.

Making Your Decision (Because Adulting is Hard)

Step 1: List all your debts, their balances, interest rates, and monthly payments.
Step 2: Obtain your credit score. Be realistic regarding where you stand.
Step 3: Use online calculators to find out what new loans you’ll qualify for.
Step 4: Examine the total cost over time, not just the monthly payment.
Step 5: Consider your own behavior. If you consolidate credit card debt but still use the cards, you’re just digging a deeper hole.

I learned this last lesson the hard way. Consolidated all my credit card debt into a personal loan. Felt amazing! For a few months, at least. Then slowly started using the cards again. Face palm. Now I had the personal loan AND new credit card debt. Don’t be like me in the past. Past me was stupid.

The Bottom Line (Because Every Finance Article Must Have This Section)

Consolidation and refinancing are both potentially effective debt management strategies. They are not magic—not that anything is—but they can make debt easier to handle and perhaps even save you money.

What’s best for you is based on your own situation, financial goals, and yeah, your habits. Be honest with yourself. Really honest. Painfully honest.

And remember, the best debt plan is always the one that leads to zero debt in the first place. That’s the ultimate goal here. Financial freedom. Being able to look at your bank account without feeling a bit nauseous.

Excuse me now, I need to go put my credit cards in the freezer again. It won’t really prevent me from using them, but the symbolism feels important.

Good luck out there, fellow debt warriors. We’re all doing the best we can with the financial education our high schools definitely didn’t give.