Unfortunately, it is all too easy to fall into a pattern of debt that is difficult to get out of. This is especially true if you have a lot of debts, such as personal loans, auto finance loans, a mortgage and credit cards. However, managing your debt does not need to be an issue. In fact, there are many ways for you to get a handle on what you owe and make repaying your debt simple.
While it will not eliminate your debt, consolidation or refinancing your debt can help make it much easier to pay off your loan. This article will explain debt consolidation programs and refinancing to give you a better about which of these debt management ideas will work best for you.
What Is the Difference Between Debt Consolidation and Refinancing?
While debt consolidation and refinancing both aim to achieve a similar outcome – lower interest rates and/or more manageable monthly repayments – there is a clear difference between them.
Debt consolidation is a type of loan that is used to pay off all your existing debts. The consolidation loan will replace your existing loans. Instead of having multiple debts to pay, you will just have to pay the consolidation loan. With a good consolidation loan, you will not have to pay as much interest. You may also get a lower monthly payment. Additionally, consolidation makes it easier to repay your debt, as you will get one easier to manage monthly payment.
In contrast, refinancing is a way of replacing a debt with a new loan and achieving better terms such as a longer repayment period or a more favorable rate of interest. Which one of these options will work best for you depends on your particular circumstances.
One of the most common types of debt is credit card debt, and credit consolidations loans are becoming a popular choice for this kind of debt relief. If you have multiple credit cards, combining them into one monthly payment allows you to track your payments more easily. Paying several bills each month can be confusing, and may result in missed or overdue payments.
Additionally, debt consolidation can work with a variety of other loans, such as payday loan consolidation. Many people take out a payday loan with the intention of repaying it in full within a short timeframe. However, this is often difficult and can result in another payday loan being taken out to repay the first.
In this situation, consolidating these debts will give you more time to clear the balance and will likely get you a lower interest rate, since payday loans are notorious for their high interest. The average payday loan comes with a whopping 400 percent interest rate, whereas the average credit card is just around 18 percent. This is an incredible amount of interest and often means you will be paying more in interest than you actually borrowed.
If you have a lot of monthly debt payments, you may wish to collapse these into a smaller payment. Debt consolidation can be done in a number of ways. For example, you may opt for a personal loan to consolidate your debt or a credit card balance transfer to put your credit card debt on one balance transfer card.
There are many refinancing options, such as taking out a new car loan to replace your existing one. One of the most common types of refinancing is a mortgage refinance. However, when using refinancing, whether for loans, credit cards or your mortgage, it is important to be sure that this is the right option.
For example, many people choose to do a refinance as a way of obtaining better interest rates. However, the length of time you repay over and how much your monthly payments will be may outweigh your new, lower rate of interest. Therefore, it is vital to do some calculations and look closely at the current refinance rates to determine whether this is the best option.
If you are refinancing your mortgage, there is the option to do what is known as a cash-out refinance. In this instance, you will get a cash payment that is equal to the difference between the mortgage balance and the value of your home. This can be a good idea if you need to renovate the property or pay off existing debts. Another common reason to refinance a mortgage is to switch from one type of loan to another. For example, you can replace a variable interest rate mortgage with a fixed-rate mortgage.
One of the most important things to consider when taking out this type of agreement is that, if you fail to keep up with the repayments, your property could be at risk. In a mortgage loan, your house serves as collateral, meaning the bank can take possession of your house if you default on your loan.
Which Is Right for You?
While there is a lot to consider when choosing between debt consolidation and refinancing, your personal situation will give you a good idea of which option is right for you. Consider the following points:
- If you have multiple debts that are difficult to keep up with, debt consolidation may be the better option.
- If your current interest rates are very high, refinancing may give you access to a better rate.
- If you need to change the type of loan you have, then refinancing will allow you to do this.
- If you want to pay off debt more quickly, you may benefit more from debt consolidation.
Struggling with debt does not need to be a problem. There are several ways in which you can make your repayments more manageable, and two of the most common are refinancing and debt consolidation. Your circumstances will determine which of these options works better for you. The key difference between the two is that debt consolidation gathers all your existing debts into one loan, whereas refinancing replaces one loan with another that offers better terms.