There are generally two things that are commonly discussed in terms of debt repayment solutions; debt consolidation and refinancing. When looking at debt consolidation vs refinancing one may think they are interchangeable ideas, but there are some important differences between the two.
It is also good to know there are some considerations that will go into deciding if either debt consolidation is the best option for you, or if refinancing will be the better option for you to go with.
Something else that needs to be addressed and that may be considered a complication is debt consolidation is many times put in a category of credit card debt and refinancing is generally used when one is describing a mortgage repayment plan they have.
The truth of the matter is there are some differences you will want to know when looking at debt consolidation vs refinancing.
Debt Consolidation: is the procedure of rolling multiple debts into a new single debt payment, effectively combining the old debts so you can pay them all off. An easy way to imagine debt consolidation is to imagine having debt 1, debt 2, and debt 3. You will take these debts, put them together and have them all in the same place, thus creating debt 4. Instead of focusing on 4, you will put them all together giving yourself one which is “debt 4”.
When looking at debt consolidation one must consider its main benefit. The primary advantage of this approach is to lower interest rates, simplify repaying debts and making them easier to manage. It’s a lot easier to send one payment out instead of sending multiple out in a month.
Another benefit that you may find is that debt consolidation may be used when you are looking to get better terms on your debt, which can lead to a faster repayment process.
With all of that said,debt consolidation is not always guaranteed to get you better terms than what you already have set up. This may happen, but it can all depend on your credit score along with the reason you are looking toward debt consolidation. In other words, proceed with your eyes wide open.
Refinancingis when you change the finance terms on a debt responsibility that you have. Generally, refinancing will occur when you take out a new loan or when you take out another financial product with different terms that what was initially set. A great way to describe refinancing will be to look at a mortgage on a home.
If a homeowner gets a mortgage with an interest rate at 4% and looks to refinance to a lower rate of 3.5%. This can be done by taking out a new mortgage to pay off the initial mortgage… this new loan would come with its own set of terms, which breaks down to the new 3.5% interest rate. It could also possibly come with a new repayment period as well.
When looking at debt consolidation vs refinancing, it is good to realize they both can be a good option for you. It all depends on what makes sense and what is the best route for you in the long run. Everyone is different and every situation is different.
It ‘s always good to educate yourself on all your options prior to making a final decision. If you need to have all payments of debt put together to make it easier, debt consolidation may be the best option; if you are looking to see if you can lower your interest rate, refinancing is the better option for you. Look at what you need and make your decision off that.