Hey! This week I’ve got a post from Jacob Evans over at Dollar Diligence. Jacob Evans paid down $25,000 in student loan debt in just 15 months. He chronicles his journey to financial independence over at Dollar Diligence. You can learn more @DollarDiligence. Enjoy!

For many Americans, debt is a fact of life, particularly if you have a college or graduate school degree.  From student loan debt to mortgages to car loans to credit card debt, there are numerous types of debt that you may find yourself in — any of which may have a high-interest rate.  The question then becomes when you should take the next step of refinancing that debt in order to reduce your interest rate.

Refinancing your high-interest debt can be a financially smart move if you do it at the right time.  So when is it the right time to refinance your debt?  While there is no one right answer for everyone, there are certain factors that weigh in favor of refinancing.

Financial Standing

The first consideration should be your financial situation.  When you refinance a loan, you are essentially applying for a new loan.  A bank will be running a credit check on you and will be looking at your income to debt ratio, your history of on-time payments and other factors.  If you are currently in a strong financial position, then it may be a great time to refinance your high-interest debt.

For example, if you initially applied for a private student loan when you were 18 or 19 and did not have a job or a strong credit history, you likely received a fairly high-interest rate without a cosigner.  Now that you are working and have had an opportunity to build up some credit, you may qualify for a much lower interest rate.   Refinancing could drop your interest rate by several percentage points, which could save you thousands of dollars over the life of your loan.

Variable vs. Fixed Interest

The next consideration should be whether your debt has a fixed interest rate or a variable interest rate.  Take out your loan documents (car loan, mortgage, student loans, etc.) and review them to find out if the interest rate is fixed or variable.  If the interest rate is variable, refinancing may be a smart financial decision, particularly in 2017 as interest rates are increasing.

Currently, interest rates in the United States are rising.  In December 2016, the Federal Reserve raised its benchmark interest rate by 0.25 percent and raised it again in June 2017.  Two additional rate increases have been forecast for 2017.  With the potential for more increases over the coming months and years mean that interest rates on loans with variable interest rates have the potential to rise significantly.  If you have a variable interest loan or debt of any kind, refinancing may be a smart option for you to avoid paying additional money in interest.

Although a 0.25 percent interest rate increase may seem small, on a large loan — such as a mortgage or a student loan — it can mean paying thousands of dollars more in interest over time.  Refinancing your loan and locking in a fixed interest rate can help you avoid these interest rate changes.  It may also help you obtain a lower interest rate, which will also result in significant savings in interest payments.

Consider Your Monthly Payments

Finally, consider what refinancing will mean for your monthly payment and your ability to make that payment.  In some cases, refinancing will mean a shorter loan term, particularly with student loans.  This monthly payment may end up being affordable given the lower interest rate, but if the loan term is significantly shorter than with the previous loan or loans, you may find yourself in a financial bind.  Shorter loan terms will help you pay off your student loans or other debt more quickly — but if you can’t make your payments, then you will land yourself in financial hot water.  Thoroughly review all loan terms before making any decisions.  Many banks and online comparison sites offer tools such as loan refinancing calculators that allow you to input factors such as loan amount, interest rate, and loan term so that you can see how much a monthly payment will be and determine if you can afford the monthly payment after refinancing.

When you have high-interest debt, refinancing can help you pay off your debt more quickly.  That was one of the ways that I was able to pay off $25,000 in student loan debt in just 15 months.  But the trick to refinancing is to approach it carefully and to refinance when it is smart to do so.  By considering your credit history, the type of interest rate on your debt and your ability to make monthly payments, you will be better equipped to make a smart choice about refinancing.

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