How to Tell if a Refinance Loan or Balance Transfer Will Save You MoneyWhen dealing with debt, restructuring it through a refinance loan or balance transfer is a common way to save money or make your payments more manageable. On the other hand, refinancing can also make your circumstances worse, adding to your debt, giving you less favorable repayment terms and costing you a lot more money in interest. Financial institutions may make claims of the savings their loans can give you, but they aren’t always straightforward. For instance, online financial service company SoFi claimed in ads that its student loan refinancing saved borrowers an average of $22,359. When the FTC investigated that claim, though, it found that SoFi’s average wasn’t accurate, as it was excluding all customers whose refinanced loans had a longer term than their previous student loans. In other words, SoFi wasn’t telling the whole story in order to make its loans seem more effective (and appealing) than they really were.

Since the savings of refinancing are realized over the long-term rather than immediately, it’s usually not obvious how good an option is at face value. Before taking out a loan or balance transfer to cover your debt, it’s important to see for yourself whether doing so will actually help you, and by how much. Read on to see how you can break down refinance loans and balance transfers to discover whether they’re a good fit for your situation.

Refinance loans

Since loans are generally structured so you make the same payment each month for a set period of time, and often come with a fixed APR, it’s pretty easy to figure out how much a refinance loan will cost you. First, you need to calculate how much you’ll pay in interest over the loan’s term, which you can do using an online interest calculator to make things easy. If you want to know the math behind the calculations, all the calculator is doing is multiplying the loan amount, the term of the loan expressed in years and the interest rate of the loan expressed as a decimal (so a 12% interest rate would be 0.12). After that, you’ll need to add on any fees that the lender charges. Most loans will at least come with an origination fee, which typically costs a percentage of the amount that you’re borrowing. Lenders should only charge you an origination fee once per loan, but make sure you read the terms and conditions of the loan to double-check. Also factor in conditional fees, such as late penalties and prepayment fees, if you think they’ll apply. Once you have an understanding of how much a new loan will cost you, look at your current loan statement (whichever account you intent to refinance) and see how the total repayment information listed on there compares to the new loan.

When searching for refinance loans, try to avoid loans that only lower your monthly payments unless you’re really struggling to pay your bills each month. Lenders usually lower your monthly payments by extending the loan’s term, which can cost you a lot of money in extra interest (if you can find a loan that reduces your monthly payments by lowering your APR without changing your loan term by much, though, that’s good). Additionally, look at the conditions of the loan to see if they’re at least as favorable to you as the loan or you’re refinancing. As an example, it’s generally not a good idea to take out a loan that uses your home or other property as collateral in order to pay off an unsecured debt, since that puts you at risk of losing a lot more if you default on the loan.

Balance transfers

While many credit card issuers will only accept balance transfers from other credit cards, some issuers will let you transfer loan balances as well. It’s a bit trickier to find how much you’ll pay over the course of a balance transfer, though, because credit cards are a type of revolving credit, which means balance transfers are less structured than loans. When paying off a balance transfer, you’re only required to make a small minimum payment to the card issuer each month, so it’s more up to you to set your own payment schedule and make sure you pay off the balance before the 0% intro APR runs out. You may want to make a budget and see how much money you can realistically put toward your debt each month to come up with an accurate estimate of how long repayment will take you. If you overestimate your ability to pay, it can cost you significantly, since credit cards tend to have fairly high variable interest rates. Another obstacle is that most credit card issuers assess different APRs to different cardholders, depending on their credit. As such, you won’t be able to know your exact credit card APR until the issuer approves your application.

The good thing about balance transfers is that the best balance transfer credit cards will give you 0% intro APR for a limited time, often around a year and a half — or longer! If you manage to pay off the balance before your card’s 0% balance transfer APR offer runs out, you won’t have to worry about interest charges, so you’ll only have to pay the card’s balance transfer fee. Balance transfer fees are common on credit cards, and typically range between 3% and 5% of the amount you transfer. Similar to a refinance loan, you can use an online calculator, like our free Balance Transfer Calculator to determine how much money you’ll pay over the course of your balance transfer.

There are other options for debt relief, but when done right refinancing is a smart way to take more control over what you owe. To find more ways you can achieve ownership over your finances, follow our personal finance blog.