Debt repayment is a strenuous journey. It also can be frustrating when you become overwhelmed by the monthly repayment amount due to various factors. Yet, there are many methods for you to take a breather, but you must choose the suitable one. Here are the differences between debt consolidation vs refinancing loan benefits.
What is Debt Consolidation?
Discussing the benefits is important; however, you must not overlook the importance of the definition of debt consolidation and refinancing loans so that you can understand them more deeply. Firstly, the explanation will be about debt consolidation.
According to the National Foundation for Credit Counseling (NFCC), debt consolidation allows you to combine multiple existing debts into a new loan. For instance, there are debt A, debt B, and debt C you are responsible for every month. Their terms are different from one another in the agreement.
The different repayment amounts and terms can be overwhelming or perhaps overlooked by accident. This is where debt consolidation can be your saviour, combining all debts into one amount and terms. However, you must be committed through and through despite the tempting low interest rates or even 0%.
What is a Refinancing Loan?
A refinancing loan allows you to change the terms–such as the repayment schedule and the interest rate–of an existing debt by typically creating another. Usually, it relates to a mortgage or a loan, like a mortgage refinance. In the particular category, there are even several types. One of them is the rate and term refinance.
The type is popular because of its lower interest rate. For example, you are a homeowner who has a mortgage at 3.5 per cent interest. To lower it, it is possible to create a new mortgage as a strategy to pay the original one, with new terms and the expected interest rate.
The Debt Consolidation vs Refinancing Loan Benefits
Both of the methods are quite useful and possibly impactful, but their effectiveness will be pointless if they are unsuitable for your financial situation. Below are the debt consolidation vs refinancing loan benefits for you to consider before choosing.
1. Low Interest Rates
The primary benefit of debt consolidation and refinancing loans is the possibility of receiving lower interest rates. Consequently, you may also have the opportunity to save your savings and probably regain your financial stability. Let us take the debt consolidation as an example.
For instance, the total amount of debts you separately repay is $25,000, with 7.5 per cent as the combined interest rate; thus, you are expected to pay around $6,799.84 within the duration of the loan. However, with debt consolidation, the total amount can be lowered to $5,050.46, with 6 per cent as the interest rate.
In other words, you may be able to save around $1,749.38. Yet, the benefit is not something you can earn freely. There are requirements to be met for you to be eligible for either debt consolidation or refinancing loans, like a good credit score.
2. Reduce the Time Frame of Debts
One of the downsides of debts is the long run. Yet, debt consolidation and refinancing loans can reduce the duration quite considerably. Let us take the refinance as the first example. Imagine that your house mortgage’s repayment duration is 22 years.
After considering, you will choose to refinance your initial loan. Its immediate effect is possibly choosing a mortgage with a 20-year or 15-year duration. However, the decision might increase the monthly payment due to the shortened time. Yet, this case is influenced by many factors, including the interest rate.
Meanwhile, you probably can complete the repayment faster, as well, due to the lower interest rate from debt consolidation. However, there should be an extra cash you have to pay each month and the fee for completing the debt before the agreed duration.
You must check the penalty beforehand in the matter because each lender puts different ones. This is the second difference between debt consolidation vs refinancing loan benefits.
3. Simple Monthly Payment
Debt consolidation is the best to simplify your monthly repayment into one single loan. It happens because the lender will pay off the balances with their fund so that you only focus on the loan from the particular lender. Some lenders even give discounts or promotions.
Yet, you must be careful. If you miss a month of your loan repayment, you can be sued. Meanwhile, a refinancing loan does not allow you to do the same. However, you can receive a fixed interest rate rather than an adjustable one. Whereas debt consolidation may reject your request to receive a lower interest rate depending on your credit score.
4. Erasing Mortgage Insurance
Private mortgage insurance (PMI)–which you must pay–is required whenever you loan a house. However, the pressure can be quite pressing that you want to escape from paying the insurance.
By refinancing your loan, it is possible to eliminate the burden, only for refinancing loans; this is the fourth difference between debt consolidation vs refinancing loan benefits.
Furthermore, there are requirements, such as 20 per cent equity–the difference between your mortgage and the price of your house in the market–or you have made a down payment of less than 20% of the purchase price. In addition to that, there can be other factors, including a good payment history and the loan’s currency.
5. Extra Cash from Equity
The last benefit of choosing a refinancing loan that differs from debt consolidation is the chance to receive cash from equity. Yet, the access is only possible if you have paid off the mortgage well through the years. Moreover, there should be some improvements done to your house.
Which One Will You Choose?
So, those are the brief explanations about debt consolidation vs refinancing loan benefits. Both of them serve their usefulness, but it is highly recommended that you choose the method that is fitting to your financial situation. If you’re still doubting your judgment, do not hesitate to seek pieces of advice from professionals and experts.
Experts will explain every detail so that you may understand the requirements. Ensure to ask everything beforehand before choosing a debt consolidation or refinancing loan. Hence, you will not have any trouble afterwards.