Once you get involved with financial difficulties, it may not be very easy to crawl out of them. But it’s not impossible. Thankfully, there are a bunch of other methods made available by financial institutions that will make loan repayments, dealing with bankruptcy and other such dilemmas a little easier to deal with due to the wide array of options available to us, some of which we’ll discuss here.
Two very useful methods of dealing with mounting debt are debt consolidation and refinancing loans. The two are very different and have a different impact on your debt, repayments as well as your credit rating. Deciding between the two is the real problem. So before you decide, which one is easier, let’s have a look at the two and what they really are:
Debt Consolidation
A debtor may have more than one loan and each one at a different rate of interest. Some of the debt could be credit card, some could be mortgage and some could be student loan. A debt consolidation is taking out one loan, from a bank or any other finance provider, to repay all the loans and then just focus on the debt consolidation loan. Usually, the interest rates on this kind of loan is pretty low which makes it a cheaper source of finance and the whole idea is so much easier to deal with. It is convenient to deal with just one creditor and the terms of the consolidation loan are much favorable to the debtor than any other kind of loan.
Refinancing loans
Refinancing loan is taking one loan and using it to pay off all the other loans. In return, you now have one loan with a preferable interest rate which considerably reduces the interest costs in your financial circumstances.
When you look at the above explanations, there isn’t much difference between the two. The latter simply uses the term ‘refinancing’ which is more like ‘optimizing’ your entire debt into one, which also happens to be cheap. In both cases, you have to make just one payment to one loan and that payment will be made to the agency, which will then take care of the loan. The difference lies in the type of loans.
The difference between the two is that consolidation mostly works well with government loans like student loans that come from government programs. However, consolidation can make repaying loans in the present much easier. Also, debt consolidation loans are stretched out over a much longer period than other loans. In return, you do end up paying an interest cost, even if it is low, over a much longer period than the other case.
If you wish to consolidate or optimize your private loans, then only refinancing your loan is an option. If you have a good credit score, then lenders in the private market will probably be competing to refinance your loans. If you wish for a favorable scenario like this one, then it will do you good to maintain repayments for a while and build your credit rating and then look for lenders to refinance your loans.
The one thing about refinancing your loan is that you could end up with either a fixed interest rate or a variable one. Before you actually take the loan, you need to do some number crunching and figure out whether it is possible that the loan could end up costing you much more in terms of interest over the years.
The question stands that which of the two, debt consolidation or refinancing loans, is better? The answer is that it truly depends on the type of debt you owe. Whether it is a student loan, a federal one or a private one, also has a world of difference. Another factor that plays a huge role is the kind of income you have. If you have a regular income coming in on a monthly basis, then a debt consolidation loan makes more sense for federal student loans. We already know that private loans can be dealt with refinancing, but what is you have a combination of the two, private and federal loans?
It is very possible to owe both types of loans and also, to combine the loans. In this case, it is better to go for student refinancing loan to accumulate the entire debt into one debt. You may lose some privileges but in return, you get to enjoy a low interest rate with a longer repayment period. With some luck, the tradeoff might bring you some advantage.
Before you make any decisions, you should look at the market thoroughly and consider all your options. What will work even better is to make a table that will help you reach a better decision.
