Debt refinancing and consolidation are terms that are often confused. While the end result is similar, the processes are different. Consolidation is the process of combining several loans into one loan in the effort to reduce multiple interest payments and to manage monthly payments. Individuals with multiple creditors and are looking for effective ways to pay back loans and other credit, have the option of consolidating debt.
Debt refinancing, on the other hand, is the process of replacing an existing debt obligation with a new loan.
Usually, people do this as a way to get a better deal on a loan, to save money or to free up additional funds..
An example of a situation where you may want to refinance is if you suddenly have a higher credit score or there is a decrease in federal lending rates and you become eligible to receive better interest rates. You would refinance your loan in such a situation to save money.
The benefits of refinancing debt
Refinancing credit or a loan allows you to keep good control over your finances. Depending on your reason for choosing to refinance a loan, when entering into a new credit agreement you are able to manage your cash flow better.
For business loans, tax benefits may apply.
Easier planning. You know well in advance exactly how much principal and interest you will pay back each month. This makes it easier to budget and make financial plans.
The limitations of refinancing debt
Simply choosing to refinance a debt does not guarantee that you will qualify for a new loan agreement. Unfortunately, for people with bad credit ratings, they may not meet the requirements to have their new loans approved.
It is worthwhile to remember that some loans carry prepayment penalties should your settle the debt ahead of its maturity. When taking out a loan for refinancing, consider this and the implications that the costs may carry toward the new loan debt.
If you are interested in refinancing a loan, contact us today to discuss a solution for you or your business.