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What Is the Difference between Refinancing and Consolidating Your Debt?

Managing one’s debt is not always an easy thing, especially when considering that unexpected expenses such as home repairs and medical treatments tend to pop up on regularly. While most individuals find ways to manage their income to repay their debt and also take care of the monthly expenses, this is not always possible.

Luckily, most banks, as well as a growing number of other private lenders have started to offer borrowers ways to manage their debt. There are currently only two ways to reduce the cost of one’s debt. Borrowers can refinance their loans, or they can get a debt consolidation loan. Both of these are equally useful when an individual cannot keep up with the monthly payments, however, they offer different advantages and disadvantages. In some cases, choosing one over the other can lead to more financial issues.

This having been said, let’s look at what each of these solutions is and who they are designed for

Loan Refinancing

Loan refinancing is the most often encountered debt management method. It enables borrowers to replace their current debt, with a new one that has different terms and conditions. Generally speaking, lenders only offer borrowers the ability to refinance only one loan at a time, and the terms tend to be mixed. In some cases, an individual will have to decide if he would rather have the monthly payments spread over a longer period, or if he prefers a more affordable interest rate.

It is also worth mentioning that refinancing is approved for individual loans. This means that if you have several loans, you will have to refinance each of them separately. Furthermore, most lenders are reluctant to allow borrowers to refinance more than one loan in a short period of time, making it important to prioritise the most expensive debt.

Refinancing can replace an existing loan with either a secured or unsecured one. This depends on the borrower’s relationship with the lender, however, in some cases; it can be a great way to turn a partially paid secured loan into an unsecured one.

Debt Consolidation Loans

Debt consolidation is somewhat similar to loan refinancing, with the exception that it works for almost all forms of debt. When an individual applies for a debt consolidation loan, he can borrow enough money to repay several other loans, as well as pay off his credit card debt and payday advances.

These loans have higher values than regular ones and are, almost always, secured against the borrower’s home. This, however, enables lenders to offer low interest rates and longer repayment terms. In most cases, a debt consolidation loan must be repaid in approx. 10 years, however, this detail varies depending on the borrower’s relationship with the lender, the amount of money that he needs and his credit score.

Deciding Which One Is Best for Your Needs

Deciding between them can be difficult, especially when considering that a debt consolidation loan is a long-term financial commitment, whereas a refinancing loan can take as little as one or two years to repay.

Furthermore, tends to be easier for individuals to refinance their loans because the process requires a lower credit score than what is needed to get a debt consolidation loan.

In the end, it all boils down to being able to predict how your financial life will be in the future. Debt consolidation loans are more advantageous if you have several types of debt that you need to manage, but repaying it can take up to 10 years.

This means that you have to be certain that you will be able to support this expense for the entire repayment term of the loan. Furthermore, it is unlikely that the lender will give you another debt consolidation loan until you have repaid the current one. On the other hand, refinancing a loan is much easier and can be done multiple times.

Author: Jason

I have spent my university years looking for the easiest way to pay off my student loan. While I have no professional financial education, I have spoken to many financial advisors and even entrepreneurs, and have learned a few great strategies that can be used to repay any type of debt, not just student or personal loans. After I graduated, I went on to interview as many successful young entrepreneurs as I could, fascinated by how some individuals handle their debt. Now, I want to share what I’ve learned. I've discovered that borrowing and repaying money can be easy and I want to show others how to do it.

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