How to compare total loan costs before refinancing expensive debt

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Replacing expensive debt with a cheaper loan may appear beneficial, but the decision should be based on a comparison of the total cost of credit, known as CET. The measure is particularly relevant when refinancing credit card or overdraft debt.

Comparing only the advertised interest rate is not enough. To assess the actual cost of the new financing, borrowers should examine its total cost before replacing the existing debt.

This can show whether the new loan is genuinely cheaper than the debt it is intended to repay. The approach helps avoid making a decision based solely on a lower nominal interest rate.

Before refinancing credit card or overdraft debt, comparing CET provides a basis for a more informed assessment of the cost of both options. The key question is not only the interest rate, but the total cost of the loan.