When debt begins to rage out of hand, many people turn to refinancing as a solution. Whether refinancing works for you depends on your individual financial situation. Information about debt and refinancing may help you decide what is best.
Credit Card Data
The average American has at least four credit cards as of 2010, according to Hoffman, Brinker and Roberts. However, at least one in 10 has more than 10 cards. Just under a quarter of American households have no credit cards whatsoever. For households with cards, the average debt per cardholder is $5,100 as of 2010, with the average debt per household at $15,700.
Non-Credit Card Data
Non-credit card debt has decreased by 2.3 percent since 2000, as reported by Hoffman, Brinker and Roberts. However, Hoffman Brinker and Roberts states that this is largely because people are defaulting on debts. For people aged 20 to 29, as of 2010, 60 percent already have cashed out their 401(k) plans, 70 percent aren't building cash savings, 43 percent are taking on too much credit card baggage, and just 61 percent--the lowest percentage of any previous generation--are covered by health insurance. The average student loan debt is $23,000. In other words, it isn't just credit card debt that is the problem. There appears to be a general lack of funds and financial planning.
How Refinancing Works
When you apply for refinancing, your lender looks at your credit history and income. They assess whether you feasibly can afford to pay off a loan in the amount you request. If your income and credit history are favorable, the lender gives you a loan. You use this money to pay off another loan you have. In some cases, the loan you pay off may be with the same lender who provides the new loan.
Refinancing Pros and Cons
Refinancing usually gives you a lower interest rate or lower monthly payments, which can save you money in the long run. However, the financial benefits of refinancing can disappear through refinancing fees such as those for application processing or early termination of the old loan.
When you refinance, typically, a lender gives you a longer loan term in order to lower your monthly payments. For some, this creates a much more manageable budget. However, a long loan term can tie up your credit and make it harder to take out new additional loans, depending on your FICO score and your lenders' requirements. Refinancing also terminates one loan. This doesn't necessarily hurt your credit score, but it eliminates an account that gives you a long-standing history. You should have other long-term accounts open to preserve your overall history.
Refinancing actually means you have to take on more debt, since you must take out a loan to pay off another. This means that those who need refinancing the most--those with poor credit and lot of debt --won't easily qualify for refinancing loans.
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