Refinancing and consolidation are two of the most popular financial options available. Both have benefits, but they also have advantages that make each better suited for a different situation. If you’re trying to decide whether refinancing or consolidating is right for you, here’s what you need to know about each option along with how they compare with one another.
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Understanding What Refinancing Is
Refinancing is a loan to pay off an existing loan. You can refinance with the same lender or with a new lender. This means that you may choose to consolidate your loans into one single monthly payment and then take out another loan from the same lender in order to pay off your other debts, like credit cards or student loans.
Or, you may just take out a new mortgage through another bank in order to lower your monthly payments on your current home loan, or even purchase a new home outright without having any debt at all!
Understanding What Consolidation Is
Consolidation is a loan that combines several loans into one. It’s usually used to lower the monthly payment and/or interest rate. Consolidation can be used to refinance student loans, car loans, and mortgages.
Lowering Interest Rates
Refinancing can lower your interest rate, which in turn lowers your monthly payment. If you have a high interest rate and are looking to refinance, it’s important to know that consolidation does not lower your interest rate.
Consolidation will only combine multiple loans into one loan with a single monthly payment. Refinancing allows you to change the terms of the loan and reduce monthly payments as well as consolidate multiple loans into one new loan with better terms (like lower rates and shorter repayment periods).
What Refinancing Offers Over Consolidation
You can use a refinance loan to lower your interest rate and monthly payments, and shorten the duration of your loan. You may also be able to access new features, like a home equity line of credit.
If you have high-interest debt with multiple lenders or are looking for a lower payment plan on one loan, consolidate a student loan can help you reduce your overall balance and monthly payments. But if you want to take advantage of new opportunities (like changing from an adjustable rate mortgage to fixed) or explore different types of financing (like getting rid of private student loans), refinancing is the better choice. SoFi experts says, “Refinancing federal student loans disqualifies them from federal repayment programs, including PSLF and income-driven repayment plans.”
The Best Situation to Be In
Want to know the best situation to be in? If you can lower your interest rate, get a lower payment, or both, then that’s ideal.
If you are just looking at interest rates, then refinancing will be better if they save you money on a new loan.
If you want to keep the same budget but pay less each month and make fewer payments over time, then consolidating will work better for you. On top of this, if the balance of debt is higher than the current value of homes or cars involved in consolidation plans (which means more money has been paid off), then it makes sense not only from an economic point of view but also from an emotional one – borrowers like feeling like they are making progress toward paying down their debt faster!
It’s clear that both refinancing and consolidation can be beneficial. But it’s also important to understand your options so that you don’t get stuck paying high interest rates or making drastic changes to your budget without knowing the full picture.
