What is the difference between debt consolidation and refinancing?
These two terms are often incorrectly used interchangeably. Here is the difference:
Debt Consolidation: Combining multiple debts into one single payment or loan. Consolidation simplifies your finances but does not end up saving you money on your new monthly payment. Your new monthly payment is simply the weighted average of your original debts rates.
Debt Refinancing: Paying down existing debt with a new loan at a lower rate. Refinancing should decrease your monthly payments and reduce your loan term, saving you money on the total interest paid.
Why would someone borrow money to pay off debt?
As counterintuitive as it may sound, it can be a way to save money and repay your high-interest debt quicker. Do not think of it as taking on more debt but rather replacing expensive debt with something more affordable. Picture having $20,000 in credit card debt at 19% interest. If you are offered a personal loan for the same amount at 11% interest, you could reduce your monthly payments and save in total interest payments.
Should I refinance?
If you are in a position where your salary and credit score have improved since you first acquired the debt, then you could be a great candidate for refinancing. Even if your financial health has remained stable, you could probably still get a better deal. Refinancing gives you another chance to shop around and research your options. Many sources of debt have variable rates, so they may have been affordable initially but over time became increasingly expensive. A fixed rate loan can help turn expensive debt into something more affordable that will help with building your credit.
Questions to ask yourself before refinancing:
Will the duration of my loan increase?
Make sure your monthly payments and terms are both decreased with your new loan. Some lenders will offer to decrease your payments by extending the length of the loan. However, the longer terms mean more money wasted on interest payments. Refinancing should reduce your monthly payment along with how long it will take you to repay the loan.
Does my existing loan have any prepayment penalties?
Some lenders charge borrowers a fine if they repay their loan early, making it harder to save money by refinancing. Make sure to check with your loan provider and, if there is a fee, try to negotiate.
Now that you have asked yourself the above questions to see if refinancing is right for you it is time to create a pre-refinancing checklist. This checklist will help you make sure you have everything in order before you sign for a refinance loan.
- Make a list of all your current debts, the amounts owed and interest rates
- Review the terms of each debt and check for prepayment penalties
- Check your credit score and credit report
- Research your options and check their rates
- Compare rates to see which rate will save you the most time and money
If you are uncertain about refinancing or simply want to learn more, schedule an appointment to talk to one of our Credit Union Experts. They will be sure to explain the process and products that are available for you. We will help you understand everything you need to know before refinancing your loan and show you why Health Advantage Credit Union is the best place for your refinance.
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