Personal Finance Fallacies - Week 5: "Refinancing and Consolidation Will Help Me Pay Off My Loans Faster"


(This is the fifth in a series of blog posts on Personal Finance Fallacies. Stay tuned for future posts in the series!)

Lots of banks and other financial institutions try to sell you on the idea that refinancing your loans or consolidating your loans into one big loan is a good idea.


Of course they think so! They want to collect interest on your debt!


But here's what really happens. Let's say that you have six credit cards with the following balances:

  • $200

  • $500

  • $800

  • $1,500

  • $5,000

  • $12,000

In total, that's $20,000.


One day, your credit union offers to consolidate your balance with them. You pay them all off, and transfer the debt to one line of credit. How much do you owe now?


Still $20,000.


Now, we could get technical about interest rates, and in some cases that can help you pay less in interest. But the point I want to make today is that there is only one way to get rid of your debt: PAY IT OFF!!!


Pay with real money! Stop playing games to transfer it here, and then there, because you got some deal on 0% interest for six months. It doesn't matter where you move it; it'll still be around until you get rid of it for good!


Refinancing or consolidating just changes the terms of the loan. It does NOTHING to change the amount owed!


Refinancing or consolidating may actually lengthen the amount of time it takes for you to pay off the debt. Usually, the financial institution that offers you the consolidation will increase the term of the loan in order to 1) decrease the loan payment, which makes it appear to be a favor to the debtee, and 2) increase the total amount of interest the financial institution makes on the loan.

If you really want to get rid of the debt, pay money on it--preferably in large amounts! Get rid of it fast! Cut down your budget to barely nothing. Sell the stuff sitting around your house that you don't use anymore. Get an extra job in the evenings. Do ANYTHING you can to throw as much money as you can toward your debt.


That is the fastest way to get out of debt.

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