Loan Consolidation and refinancing are two commonly-discussed debt repayment solutions. Although these kinds of terms are oftentimes utilized interchangeably, there are certain significant differences between the two along with the considerations that go into choosing which one is ideal for an individual. In addition to the complication, what is known as “consolidation” is often associated with credit card debt while “refinancing” is frequently utilized to describe a specialized mortgage repayment strategy. In actuality, most kinds of debt can be consolidated or refinanced. Each of such options may be a viable strategy for these credit card debt. Here is a brief description of the two approaches, with an emphasis on how one would essentially utilize them for credit card debt.
Debt Consolidation
As one has discussed loan consolidation quite a bit lately, to involve smart strategies one can utilize to consolidate debt along with its impact on the credit score. Following is a quick refresher.
Debt consolidation is the actual process of paying off two or more kinds of pre-existing debts with a novel debt, particularly combining the old debts into one novel financial commitment.
As an outstanding example, make sure to imagine a person who has three credit cards: for instance A, B, and C.
To begin with, a person opens a novel balance transfer credit card that would be called card D. Post can transfer the balances from card A, B, and C to card D—meaning that A, B, as well as C now have legit no balances. From starting on, it would make payments toward card D, as well as that will be the only credit card obligation that could be necessarily assumed to close card A, B, and C or don’t utilize them. That’s consolidation.
Its key benefit is that it eases repayment along with making the debt easier to manage. In such an example, sending a payment every month would be pretty easier than three. A secondary benefit is that consolidation can be utilized to get improved terms on the debt, which makes repayment faster. For instance, assume that card D had a promotional, zero-percent interest rate whereas cards A, B, and C had been racking up interest with rates over 15 percent. Just ensure that consolidation does not ensure to always get the better terms. It depends on the credit score as well as the aim of the consolidation.
Refinancing
Refinancing is made simple by changing the finance terms on a debt obligation. Typically, this also occurs by availing out a novel loan or other kind of financial product with different terms. The most common example is a mortgage refinance. There are different kinds of mortgage refinances, nevertheless one would focus on the “rate-and-term” refinance. This has been incredibly famous in upcoming years given the historically lowered interest rate that has been available. It works for instance this: let’s say a homeowner has a mortgage at 4 percent interest. Nonetheless, it wants to refinance at a reduced rate, say 3.5 percent. The homeowner could typically take out a new mortgage to usually pay off the original mortgage. The novel loan would have novel terms, meaning a novel interest rate, here it would be essentially 3.5 percent and potentially a new repayment period.
What about credit cards?
One would not hear about such as “refinancing credit cards” as frequent, nonetheless it is potentially and quite common. It can be pretty difficult to decipher the true difference between refinancing credit card debt along with consolidating it. The confusion comes from the fact that numerous industries, companies, as well as individuals utilize this financial vocabulary in varied ways. For example, most companies may refer to balance transfers as credit card refinancing, as well as will only utilize “debt consolidation” to refer to a strategy including a consolidation loan.
An argument against considering this to be a “refinance” is that frequently the negotiated terms are temporary. The creditor might reduce the rate of interest for a short period of time as a hardship one is experiencing, however that is much more varied than agreeing to a fundamental change to the rate of interest for the rest of the time as a card holder.
What About a Debt Management Plan?
One might also think of a debt management plan popularly called as (DMP) as combining the prime features of consolidation as well as refinancing. A DMP does not generally consolidate the debts, however it allows a person to pay a single monthly payment for all the credit cards on the plan. One pays the credit counseling agency one payment, along with distributing that payment to the creditors. It also has the benefits of being a highly effective refinance as the debts are frequently charged reduced interest rates while on the plan.
The Conclusion
The different kinds of terms utilized to describe debt repayment options can usually create certain confusion. By the end of the day, the appropriate language does not matter as much as the outcome. Ensuring that managing the debt is critical along with consolidating the payments may make the management more accessible as well as easier. In addition, the terms of the debt are vital as they will affect how affordable the debt is along with how quickly one can pay it off. There are numerous repayment strategies that can incorporate such variables. If one would like to assist thinking through the strategy that may be greatest for an individual, make sure to contact a credit counselor for free assistance.