The world of finance can be a tough landscape to navigate if you don’t have a strong understanding of all the terminology. For example, many often confuse debt consolidation and refinancing. The two are somewhat similar in that they are both done in order to improve your financial situation. But they are very different processes, and understanding the difference will enable you to make a more informed decision about your finances.
Understanding Debt Consolidation
Put simply, when you engage in debt consolidation, you are consolidating several loans into one loan, hopefully ending up with an easier payment to make each month. This is often done with a financial planner or service that specializes in consolidating loans. Some people also have the option of taking out a second mortgage on their homes in order to pay off several smaller loans, which is where debt consolidation often gets confused with refinancing.
What Is Refinancing?
Refinancing loans is often performed on a mortgage or another loan of a high amount. The main idea of refinancing is to take advantage of lower interest rates in the market and subsequently have a lower monthly payment. You might also choose to refinance if you want to change other terms of the loan, such as the time in which you have to pay it off.
Refinancing Loans in Order to Consolidate Loans
It is not uncommon for homeowners with other debts to refinance their home and, with more preferable terms on their new loan, use any additional cash to pay off smaller loans. There are risks involved with this, however. For instance, if an unfortunate incident such as job loss should occur, you may risk losing your home if you are no longer able to pay the loan.
However, one big advantage of debt consolidation is you can make easier monthly payments to one source, rather than many payments to multiple sources that keep collecting interest, which tends to make it much harder and take longer to pay off those debts. When seeking to refinance or consolidate loans, it is best to talk with a financial planner first. The financial expert or an expert at your bank can help you choose an option that is best for you.