Should I Refinance My Debt?
As you know, I am a HUGE Dave Ramsey fan and I also have a degree in psychology. I certainly understand that debt is not a math problem and is a mental problem. You have to fix the spending and the mental side of things before you start to focus on the math problem. Are you thinking “Should I refinance my debt”? Here are some things to consider before refinancing your debt.
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Refinancing loans has recently become very popular in Scandinavia and the USA, where people in general have a high amount of debt. However, refinancing isn’t the only solution but it can help in certain situations.
Getting out of debt is 80% mental.
Study after study has shown that getting out of debt is a psychological problem not a math problem. Refinancing debt focuses on the math problem not the psychological problem. However, there are some instances where refinancing would be a good idea.
Are You Actively Working On Paying Off Debt?
Refinancing is not going to fix your debt problem. The problem is spending money you don’t have. You have to work on fixing the mental side of the problem before fixing the math side. You have to suffer so to speak through paying off debt so that you hopefully won’t fall back into debt. I would suggest intensely paying off debt for at least 6 months before refinancing debt.
For tips on paying off debt:
Do you have a solid zero-based budget?
If you are actively paying off debt, you should have a written budget. A zero-based budget is a little different from just a regular budget in that you budget every dollar. I also had a written budget but it wasn’t until I started doing a zero-based budget that we were able to get intense with paying off debt. Having a zero-based budget is like giving yourself a raise. If you don’t have a solid budget, refinancing isn’t going to help in the long run.
For tips on budgeting:
Are your payments more than your income?
When considering if you should refinance your loans, one thing to consider is how much money you have coming in. If your payments are significantly more than the income coming in, refinancing could be a temporary solution to help. The problem with that is, you can’t get comfortable. You still have to continue with the same intensity and not lose steam. The biggest problem with refinancing is that you can breathe again and that causes people to slow down. However, IF you have been intense with your budget and paying off debt for 6 months, you are more likely to follow through. You don’t want the debt hanging around forever.
Is it going to take longer than 2 years to pay off your debt?
If you have a huge amount of debt, like student loans for instance, and it will still take longer than 2 years to payoff even with being intense then refinancing may be a good option. If you can have it paid off in less than 2 years and that should be your goal, then it may not make sense to refinance. Refinancing can cost money but it doesn’t always. Basically this comes down to math and if the cost of refinancing is worth it in the long run.
You have $25,000 in student loan debt and your interest rate is 6.25%. If you pay is off in 24 months, you pay roughly $1600 in interest in those 24 months.
If you refinance through a lender like Lendedu at 3%, you cut that in half at roughly $800 in interest for those 24 months. You save $800 over 2 years but if you can have it paid off quicker than that you are talking about maybe $400-$600 depending on how long it takes you. If it will take you longer than that, it is worth looking into.
If you have a much larger amount of student loan debt, you could save even more by refinancing with Lendedu. The average student loan debt is over $30,000 which means that a lot of people have more than that. If you have $50,000 in student loans, the amount you could save over 2 years is over $3000 if you refinance.
The great thing about Lendedu is that they refinance federal and private student loans and it’s FREE to check them out. They find numerous offers for you so that you can find the lowest rate. Their average customer saves over $14,000! Now if you can save that much then definitely do it. But you want to remember what your end goal is and that is to be debt free. If you are doing the other things I have mentioned then I think refinancing could be a good thing.
Should I Refinance My Debt?
So, if you are still thinking if you should refinance like people in Scandinavia and the USA, where people in general have a high amount of debt. You want to look at the big picture and make sure that refinancing is going to further your long-term goals. That is why you want to focus on paying off debt before refinancing. If you have a low income and high debt then refinancing may be the best option so that you can focus on paying off debt quicker. Just make sure if you do refinance that you continue to be intense with paying off your debt.
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