Debt Consolidation Vs. Refinancing – What’s The Difference?
If you’re looking for ways to pay off your debt, two options you may have heard of before include debt consolidation and debt refinancing – but how do you know the difference between them and which option might be right for you?
We’ll cover what each strategy is, how they impact your debt, and considerations to make when reviewing a lender’s offer.
What Is Debt Refinancing?
Debt refinancing is when you take out a new line of credit or loan under different terms to pay off an existing debt (or multiple debts) usually at a better interest rate or lower monthly payment.
For example, let’s say you’re currently paying down loan A with an interest rate of 6% and a remaining balance of $5,000. If you were offered a lower interest rate of 5%, you might take out loan B for $5,000 to payoff loan A using a lower monthly payment and saving money in interest over time.
It’s important to note that neither refinancing or debt consolidation eliminates your debt. Ultimately, you’d still be responsible for paying down the remaining balance, but hopefully at a lower interest rate or monthly payment. You can refinance a single debt or multiple debts – individually, or combined (the latter would be considered consolidation).
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What Is Debt Consolidation?
Debt consolidation involves taking out a new line of credit to pay off multiple loans, consolidating them into a new, single monthly payment. Similar to debt refinancing, debt consolidation does not eliminate any of your existing debt, but rather, simplifies your payments under new terms.
For example, let’s say you had loan A for $2,000, loan B for $3,000, and loan C for $4,000. You might consolidate them into a single loan of $9,000 to make your payments easier. It’s possible that new loan might use an average weighted interest rate of loan A, B and C –effectively keeping your interest rate the same – or use a new interest rated depending on the terms of the offer. Be sure to read the terms of your new loan closely before signing.
Ideally, in addition to consolidating your monthly payments, you’d also hope to get a lower interest rate or lower monthly payment.
Thinking about consolidating your student loans? If you have private student loans and can get a better offer, then student loan consolidation can make a lot of sense. Depending on the type of student loans you have – federal or private – you’ll want to understand the pros and cons. This is especially true if you have federal student loans or are on an income-driven repayment plan, as there can be significant risks.
The Difference Between Debt Consolidation And Refinancing
The major difference between debt refinancing and consolidation is that debt consolidation must involve more than one debt, while refinancing can be applied to a single or multiple debts.
Both debt consolidation and debt refinancing involve taking out a new loan or line of credit to pay off existing debt. Regardless of which you choose, the new loan will come with new terms that could be beneficial for you. With a new loan, you could:
- Lower your interest rate, saving you money in the long run
- Lower your monthly payment, freeing up cash on the monthly basis
- Simplify your payments, so you only have one debt to pay instead of several
What To Consider When Refinancing Or Consolidating
Most people refinance because they are looking for either a lower monthly payment, a lower interest rate, or both. Obtaining a lower interest rate could save you the most money in the long run. But it’s also possible that you prefer a lower your monthly payment, regardless of the interest rate or repayment period – even if that extends the repayment period for your debt, it may free up cash for other priorities.
So how do you know whether it’s the right decision for you? Consider the following four questions:
- Will consolidation or refinancing help you manage your payments more easily?
- Will the new offer lower your interest rate, monthly payment, or both?
- Will it increase or decrease the total amount of debt you pay overtime, including interest?
- Will it extend the amount of time you are in debt? This may be particularly important if you’re considering another loan or mortgage down the road, as any existing debt will impact your debt-to-income ratio.
- Is there any prepayment penalty in the event you want to accelerate your debt payoff at a later date?
The Bottom Line
At the end of the day, whether you decide to consolidate or refinance your debt will always be a personal decision. Armed with the understanding of the major differences between the two methods, we hope you’re in a better position to decide what might make sense for you on your financial journey.
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Credit Card Refinancing vs. Debt Consolidation
Which is better for your debt situation, credit card refinancing or debt consolidation? Debt consolidation and credit card refinancing can both be effective strategies for managing your debt. Your personal financial situation should drive your decision. As you consider your options, it’s important to understand what each strategy means.
Debt consolidation is when you combine multiple debts into one lower-interest loan, like a personal loan. That leaves you with one set regular monthly payment and a fixed repayment term. You won’t have to juggle several payments over an undetermined length of time.
Refinancing means negotiating new terms for existing debt. That could mean a lower interest rate or a different payment schedule. Transferring a credit card balance to another card with a 0% introductory Annual Percentage Rate (APR) is one way to refinance credit card debt.
If you have a lot of high-interest or variable-rate debt, a debt consolidation loan could help you pay off your debt faster. Combining multiple credit card balances into one could simplify your payments and potentially lower the total interest you pay. But if your debt burden is smaller, it might make sense to refinance instead.
Read on to learn if credit card refinancing or debt consolidation is right for you.
Table of contents
- What is debt consolidation?
- What are the benefits of debt consolidation?
- What is credit card refinancing?
- Who should consider credit card refinancing?
- The bottom line
What is debt consolidation?
Debt consolidation is a financial strategy that allows you to combine multiple debts into one.
If you have credit cards, a car loan, medical bills, or other loans, you likely get multiple monthly bills, at different times. Your terms and rates will vary by creditor and your monthly payment amounts may fluctuate on some bills. .
Depending on the type of debt you carry, interest rates could differ across different accounts. They could even change entirely if you have an introductory APR. Your payoff dates could be years or just months away and paying a debt off early could result in penalties. Each of these variables can make it difficult to plan your payments and manage your finances.
Debt consolidation can simplify how you pay your bills. It could also help you gain better control of your financial situation.
What are the benefits of debt consolidation?
When you receive a debt consolidation loan from a reputable lender, you can use those funds to pay your creditors directly. Generally, you cannot pay off a credit card from the same lender who provides your debt consolidation loans; be sure to read the loan terms carefully before you accept a loan.
Instead of managing multiple debt payments each month, you’ll only pay your personal loan lender when you consolidate your debt through a personal loan. This is for a set term until the loan is paid in full.
This strategy may make paying off multiple debts easier to manage. It could also offer the benefits of flexible repayment terms and lower interest rates. Even small interest rate increases can cost you more money on variable rate debt. By consolidating debt into a fixed interest personal loan, you could potentially save hundreds, even thousands, of dollars in higher-rate interest.
Curious about how much you could save? Discover ® Personal Loans offers a free debt consolidation calculator to help you estimate interest savings.
What is credit card refinancing?
Credit card refinancing is a financial strategy specific to getting a better rate. If you still carry your first credit card, for example, it could have a higher rate because you got it when you were establishing a credit history. Or maybe you are carrying a higher balance than usual, and the interest rate is causing your minimum payments to increase.
A balance transfer is another way to refinance credit card debt: You could apply for credit with better terms and a new lender and move existing credit card debt to the new card. Or you may be able to get a lower balance transfer offer from one of your existing credit card lenders.
Who should consider credit card refinancing?
If you have a balance on a credit card that’s costing you a lot in interest, you might consider transferring the balance to a card with a lower APR. Or one with 0% introductory or promotional APR, which often lasts for 6-18 months.
This strategy could be helpful if you’ll be able to pay off the balance completely in that introductory period. For example, a borrower with a $10,000 balance on a card that charges 20% interest could save approximately $2,000 in interest the first year alone if they switch to a 0% APR card with a 3% transfer fee, monthly payment of $300 and make no additional purchases.
But there are drawbacks to refinancing credit card debt this way.
Most lenders charge a balance transfer fee of 3% to 5% ($300 to $500 in the example above).
Introductory periods don’t last forever. If you’re not able to pay off the balance before the end of that period, you’ll be subject to the card’s standard interest rate. As of June 2025, the average credit card interest rate was 20.12% APR.*
If you have credit card debt that you won’t be able to pay off within an introductory rate period, it might make more sense to consider a personal loan instead of a balance transfer, even if you’re getting a temporary break on interest, because you could end up paying a higher APR than the original rate once the intro period ends.
You can apply for a Discover Personal Loan of any amount between $2,500 and $40,000. With a fixed interest rate and a set regular monthly payment for the life of the loan, you’ll know exactly when you’ll have this debt paid off.
The bottom line
If you have a smaller amount of credit card debt to manage, it may make sense to consider a balance transfer to a 0% APR credit card. But if you have multiple high-interest or variable-rate debts, consolidating debt by combining those bills into one personal loan may simplify your life. It could also help you pay off debt faster and save you money in interest.
In fact, 85% of surveyed customers said they saved money by consolidating debt with a Discover personal loan and nearly half said they saved an average of $428 per month. Additionally, 89% of surveyed debt consolidation customers said they expect to pay off existing debt sooner**
- Compare Consolidation Options
- Credit Card Consolidation
- Paying Off Debt
Articles may contain information from third parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third party or information.
All figures are from an online customer survey conducted in September 2024. A total of 736 Discover personal loan customers were interviewed about their most recent Discover personal loan with 546 of them using the funds to consolidate debt. All results @ a 95% confidence level. Respondents opened their personal loan between January and July 2024 for the purpose of consolidating debt. Agree includes respondents who ‘Somewhat Agree’ and ‘Strongly Agree’. For debt consolidation, even with a lower interest rate or lower monthly payment, paying debt over a longer period of time may result in the payment of more in interest.
https://www.rocketmoney.com/learn/debt-and-credit/debt-consolidation-vs-refinancing-whats-the-differencehttps://www.discover.com/personal-loans/resources/consolidate-debt/debt-consolidation-vs-refinancing/
