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FDIC Consumer News

Spring 2014

Refinancing Loans: Not Just for Mortgages

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Most people know they can refinance a mortgage - that is, replace an existing loan with a new one that may offer better terms. But did you know you also can refinance personal loans, including auto loans, credit cards and student loans?

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

Here are ways to see if refinancing makes sense for you.

Think about your goals. For example, if you want to simplify your life by consolidating multiple credit card accounts, most card lenders allow you to transfer balances from other accounts for a fee. "Once you determine what you want to accomplish, you can make a better decision about whether refinancing is right for you," Boenau added.

Understand potential pitfalls. While you may be able to take advantage of promotional offers, such as introductory zero-percent interest or low Annual Percentage Rates (APRs), by transferring a balance and closing a credit card account, you also may have a higher APR than what you were originally paying when the promotional rate ends.

Closing a credit card account also reduces your available credit and may adversely affect your credit score, which lenders often use to determine your interest rate. To avoid a reduction in your credit score, consider keeping cards you have managed well for a long time.

A balance transfer also may result in your account having multiple interest rates (such as one for your "purchase balance" and one for your "transfer balance"), so know how your payments will be classified. For instance, if you only pay the minimum required each month, a creditor can generally apply that payment any way it chooses. This includes applying your minimum payment to lower-rate balances first, which means higher-rate balances will keep accruing higher interest costs. Depending on the circumstances, a large balance transfer also may trigger fees for going over your credit limit until you can bring the balance down.

Other examples include the following:

If your credit score is low, consider waiting to refinance until you can raise it. You can protect yourself by ordering a free copy of your credit report from each of the three major credit bureaus (visit or call toll-free 1-877-322-8228) and correcting inaccurate information.

Also remember that, for purposes of improving your credit score, the most important things are to be financially responsible and to correct any errors in your credit reports.

For more tips on improving your credit report and score, see Your Credit Reports and Credit Scores: Simple Steps to Make Them Better.