If you feel that your debt is getting the better of you, there are a few ways to take back control. Are you wondering how debt consolidation works? Maybe you’re thinking about refinancing? Before making any decisions, learn the difference between loan consolidation vs refinancing.
How to Choose: Loan Consolidation vs Refinancing
When Consolidation Makes the Most Sense
Debt consolidation is a financial move for someone with a lot of consumer debt. This debt must be unsecured- not tied to an asset. Examples of unsecured debt include credit cards, department store cards, credit lines, and unsecured personal loans.
You might be a good candidate for consolidation if you have a lot of credit card debt and have trouble managing payments and high-interest rates. Once you consolidate your loans, you essentially create a new loan that takes up all the debt. Your new loan is now one monthly payment.
If you decide to go through a debt consolidation company, there won’t be a new loan but a lot of great benefits. Non-profit credit counseling agencies can work with you to get your debt paid. You will make one monthly payment to the agency who then distributes the funds to your creditors. They may also get you lower monthly payment amounts as well as interest rates.
When Refinancing Makes the Most Sense
One of the most common things to refinance is a mortgage. A mortgage is one of the longest loans a person can have. As the years go by, a better interest rate may pop up. This is one of the best reasons to refinance a loan. You may also want to shorten the length of your repayment from a 30-year mortgage to a 15-year mortgage. Keep in mind that this will increase your monthly payments while saving money on interest.
Here are some reasons you might consider refinancing:
- Reduce monthly payments and overall cost by lowering the interest rate on your mortgage.
- Save thousands of dollars in interest by reducing the term or length of your loan.
- Switch your mortgage type from an adjustable rate mortgage (ARM) to a fixed-rate mortgage or vice versa.
- Take cash out to renovate your home. A cash-out refinance uses the equity you already have in your home to pay for upgrades or repairs, usually at a lower rate than a home equity line of credit.
- Pay off debt. Use the money you saved by lowering your monthly mortgage payment to pay down debts.
For more information on refinancing, check out The Benefits of Refinancing.
Final Notes on Loan Consolidation vs Refinancing
When thinking through loan consolidation vs refinancing, take into account your entire financial situation, including your own personal habits.
Finally, consolidation is a solution for consumers in a tough place. Refinancing doesn’t necessarily mean that you are having trouble, but rather you have the chance to improve the terms of your loan.
To speak to a credit counselor today about budgeting and managing your finances, call 800-769-3571.