Debt tool 2: Refinancing and consolidation

When you’ve got multiple sources of debt, it might be beneficial to consider refinancing or consolidation to simplify and, in some cases, lower your payments.

Like anything that sounds too good to be true, it’s important to research and understand these tools and whether they’re the best option for repaying debt.

What are refinancing and consolidation?

Refinancing is essentially replacing one loan with another. When you refinance, you get a new loan with a lower interest rate to repay the old loan.

Debt consolidation combines multiple debts into one, so you have just one payment instead of several.

If refinancing or consolidation is right for you, you could pay off your debt much more quickly than you think. However, both refinancing and consolidation require you to have a good credit history and score.

If refinancing or consolidation are right for your situation, they could help you pay off your debt faster.

Debt refinancing

Debt refinancing can take different forms depending on the type of debt you’re refinancing.

Refinancing credit card debt can be done by doing a balance transfer of some or all of your current debt to a low or 0% APR credit card or through a personal loan.

When refinancing a loan like a car loan or home mortgage, you replace the old loan with a new loan with more favorable terms, such as a lower interest rate. You typically need to refinance with the same type of lender for those.

Factors like loan amount, interest rates, equity (if refinancing a home) and credit score are considered when refinancing. For example, it wouldn’t make sense to refinance into a loan with a higher interest rate. You also can’t refinance your home loan without enough equity.

Your credit score is considered when you apply for a new loan or credit card. You should also consider your new loan terms and closing costs.

Refinancing may not be a good idea if your credit score or other factors don’t allow for a lower interest rate than you currently have. Though you’ll lower your payments when you refinance (thanks to a lower interest rate), you may extend the length of your loan, which could cause you to pay more.

Debt consolidation

Debt consolidation helps you better organize your debts by combining multiple debts into one payment.

Similar to debt refinancing, interest rates, terms and credit score all factor into whether or not debt consolidation is a good idea for you. For example, a debt consolidation offer could have a higher interest rate than you already pay.

The upfront fees to process the consolidation may make this tool cost more than it’s worth in some situations. Fees associated with a personal loan include origination fees starting at 1% and up, and you’ll also need to consider loan interest. When transferring a balance to a credit card, even with a 0% intro APR, you may also be required to pay an annual fee, a balance transfer fee and interest after the intro term ends.

Check out our debt consolidation calculator to find out what your payments could be if you consolidate your debt.

How to decide if refinancing or consolidation is right for you

There are clear differences and some overlap in refinancing and consolidation.

For starters, there are different types of debt, including credit cards, mortgage loans, auto loans and student loans. Not all of these debts can be refinanced or consolidated in the same way.

For example, consolidation is used when you have more than one type of debt, such as multiple credit cards. Refinancing is when you want to lower the payments or interest on one debt at a time.

Your debt repayment timeline and total number of payments will likely be dictated by your total debt amount and the interest rate on your refinance or consolidation. Your credit score, which is affected by your on-time payments, debt-to-income ratio and credit utilization, will decide your interest rate.

Other considerations are closing costs and other fees. Sometimes these amounts can be so high that they make the refinance or consolidation not worth it. It’s important to do your research and compare the costs associated with either option to know which will actually save you money in the long run.

Other debt paydown tools to consider

In addition to refinancing and consolidation, there are other debt payment tools to consider. These can work alongside refinancing and consolidation to help you gain control of your finances.

Debt management is when you create a plan to pay off your debt through strategies such as budgeting and various paydown methods. Budgeting for your debt will help you prioritize paying off it by making it a necessary monthly payment, just like your living expenses. Whether you refinance or consolidate, you’ll still have to make payments toward your debt, which should be added to any budget you follow. Additionally, you might consider either the debt snowball or debt avalanche paydown methods.

If you want professional help managing and paying your debt, consider working with a debt relief company like National Debt Relief. Debt relief companies will negotiate with your creditors to lower your interest rate and even settle your debts for less than you owe in some cases.

Each situation is different, but there may come a time when you need to repair your credit either while or after you pay off your debt. If that’s the case, be sure to research credit repair. Like debt relief, there are companies that specialize in credit repair to help you through this process.

Next Steps

Refinancing and consolidation are two debt management tools that could be right for you. Consolidating your debts means you would have one payment instead of several, with a lower interest rate. If you refinance your loans, you could see smaller payment amounts thanks to a lower interest rate.

These debt management methods aren’t for everyone, and you should always do your due diligence to ensure you’re making the right decision.

Visit our National Debt Relief hub for more information about debt management tools.