Banks as well as other private lenders are constantly working to make their offers more attractive to the average consumer. Furthermore, as digital banking has evolved in the past 20 years, it is now easier than ever to get a loan or a line of credit. These two factors have led to a large number of individuals playing for loans, sometimes against their better judgement, to pay for anything from medical procedures and treatments to holidays abroad and new smart devices. Unfortunately, borrowing a large amount of money can put a lot of strain on one’s finances and make it difficult to keep up with one’s regular monthly expenses. When this happens, lenders regularly offer borrowers two solutions. They can request that their loans be refinanced, or they can apply for a debt consolidation loan. Both of these help make the debt more affordable, however, how do they compare with one another? Here is what you need to know:
What Does It Mean to Refinance a Loan?
Generally speaking, loan refinancing is the banking process through which a borrower takes out a new loan in order to repay one that has either become too expensive or is nearing its repayment term. The purpose of loan refinancing is usually to get an interest rate that is lower than the one that was attached to the initial loan, but the method can also be used to get a longer term for the loan, giving the borrower more time to repay the money.
From a functional point of view, the terms and conditions of the refinanced loan are completely dependent on the borrower’s credit rating. Furthermore, the process can have a negative impact on one’s credit rating because it may signal to the lenders that an individual is unable to properly manage his personal finance.
What Is a Debt Consolidation Loan?
Debt consolidation loans are becoming increasingly popular among individuals who have two or more forms of outstanding debt and they cannot keep up with the monthly payments for them. Unlike the process of refinancing a loan, debt consolidation allows individuals to get loans that are large enough to cover multiple types of debt, effectively allowing borrowers to repay some or all of them in full. It is also important to mention that debt consolidation loans are always secured, which means that the borrower must offer collateral in order to borrow the money. In most cases, lenders require individuals to secure the loans against their homes, however, it is possible to offer other properties as collateral, provided that their value is high enough.
How Should They Be Used?
Loan refinancing is usually the better choice for those who have a single problematic loan that they cannot keep up with. The process does not require the borrower to offer any collateral and the interest rates are always lower than those attached to the initial loan. The downside is that most lenders will not allow individuals to refinance more than one loan at a time. Those who have more than one type of debt that has become too expensive to handle will have to take out a debt consolidation loan. While this is a secured loan and implies the risk that the lender might take possession of the borrower’s property, it does have a low interest rate and a term that is longer than most regular loans. Furthermore, the money can be used to pay off credit card debt, personal loans, and even lines of credit provided that their value is not too high.