If you have to consolidate multiple debts, one of your options is to refinance existing debt. With everything that is happening to the economy, it seems like Americans are serious about improving their financial situation. In fact, it is revealed that almost 3 out of 10 Americans consider paying off their credit card debt as their biggest financial goal.
Admittedly, completely paying off your debt can be very challenging. This is why you need to have a debt solution that will make things easier to accomplish. It will help you have a more structured payment that is customized according to your financial situation. That means it will allow you to pay off your debts without making it feel like a burden.
One of the best strategies to improve your repayment plan is to consolidate multiple debts. And you can do that by refinancing one of your current debts.
Use these 3 debts to consolidate multiple debts by refinancing
Refinancing involves getting a new loan for an existing one. The goal is usually to take advantage of improvements to the repayment plan. This can include a shorter or longer repayment period. This will depend on how much you can afford to pay each month. The improvement can also be on the interest rate. If you can get a lower interest rate, that would be a huge improvement.
Now that you have an idea on what refinancing is all about, let us get to know how you can do it. There are three types of debt that you can refinance to help you consolidate the different debts that you owe.
This is probably the most popular way to refinance. At least, this is true for homeowners. The great thing about a mortgage is that every payment you make adds to your home’s equity. Thanks to this growing equity, you can expect your personal net worth to increase as well. The best part about this is you can use it to help make debt repayment easier.
When you refinance your mortgage, you need to find out how much equity you have. The thing about using a mortgage is you need to pay closing costs to complete the application. But if the decrease in the interest rates can make up for these costs, then it could still work out in your favor. As you refinance, you can also use the equity to consolidate multiple debts. If you include high-interest rate credit card debts, it might even be more beneficial.
Of course, you need to be careful when you are using your home in debt consolidation. If you are not careful, you might end up losing your home if you fail to pay back the debt.
Auto loan refinancing
Another refinancing option involves your car loan. Just like your mortgage, this can help with high-interest debts because it is a secured loan. You are putting the vehicle as collateral. However, unlike a home loan, the collateral does not appreciate in value. Instead, cars depreciate. This is why it is best for short-term repayment plans. You also cannot expect to refinance a huge debt amount because, as mentioned, cars depreciate in value.
The same rule applies when you take out an auto refinancing. You have to pay it off as quickly as possible so you can benefit from the savings.
Balance transfer cards
Technically, this is credit card refinancing. You get a new credit card that you will use to transfer all your debts. A balance transfer card is usually offered with a 0% interest rate or at least a very low one. When you transfer your other credit card debts, you need to pay a fee that is usually 3% of the amount you transferred. But with all the savings you get from the 0% interest rate, it should be worth it.
This interest rate is only temporary so you should make sure that you can pay all of your debts within the promo period. Otherwise, the card will have a higher interest rate and it can cost you more. If you really want to consolidate credit card debt through a balance transfer, make sure that you have a short repayment plan. That way, you do not have to worry about the high-interest rate once the 0% interest rate expires.
Apart from credit cards, it is also possible to consolidate personal loans. But make sure you make the necessary calculations. You want to ensure that you are saving money and not paying more if you just left the debts in their original repayment plans.
When is it a good idea to refinance for consolidation
Although some people can swear that refinancing to consolidate multiple debts is a good idea, it is not always the case. There are specific situations when it can be a bad idea while there are instances when it is a good one.
Here are the specific situations when consolidating debts through refinancing is a good idea.
When the average interest rates are lower
According to reports, the Federal Reserve has no more plans of increasing the interest rates this year. That means if you find the current rates to be lower than what your current debts have, it should be a good time to refinance. It might increase again when the next year comes. You should take advantage of the stagnant interest rates for now.
When you have a better credit score
Your credit score has a huge influence on your interest rate. If you have improved your credit reputation since you borrowed your original debts, it could help you get a lower interest rate. This will really work well in your favor. You get more options and probably negotiate better terms for the new loan that you will borrow.
When you need better repayment terms
Finally, it makes sense to consolidate multiple debts through refinancing if you can improve your repayment terms. By improvement, this means it suits your financial situation better. A lot of things can happen from the moment you started with your debts until this very moment. It is possible that events in your life made it harder to keep up with payments. If that is the case, then you need a new repayment plan that will allow you to pay a smaller amount. Or maybe there is now a need to pay off your debts faster. That means you need to be able to make bigger payments so you can completely pay off your debts within a shorter time. These can be arranged when you refinance your debts.