Loan refinancing is one of the options that you can use to consolidate debt. While it is effective, you need to get to know it completely to determine if it is the right option for you to follow. That way, you can check if it is a perfect fit for your specific debt situation. You can also analyze if your current financial position can afford the new repayment plan that it will bring. After all, this debt solution will not bring a reduction of what you owe. The most that you can hope for is a lower interest rate. But when it comes to your balance, you still have to pay it all off.
If you do this correctly, you might be getting yourself one step closer to improving your financial future. It will not just help you get out of debt. It can also help you save money in the process.
About loan refinancing to consolidate debt
So what do you need to know about loan refinancing?
If you think that you cannot consolidate without using a loan, refinancing is one of the options that you can use. This involves borrowing a new loan so you can use it to pay off any outstanding debts that you have. This can include credit card debts, mortgage, car loans, student loans, medical bills, and even other personal loans.
The goal of loan refinancing is to change the repayment plan of the borrower. It usually leads to three different results.
Single monthly payment
This makes it less likely for you to forget payments. Since the payment is simpler, it will not cause you a lot of stress. You do not have to exert too much effort in monitoring your payments. That will leave you some room to concentrate on other things – like increasing your income so you can pay more towards your debts.
Lower interest rate
This is probably the most prominent reason to refinance your debts. If you cannot find a loan that can lower the interest of your current debts, then it does not make sense to consolidate debt. Getting a lower rate means having a good credit standing or offering collateral for the loan. The lower interest rate will help you save money on the overall debt payments.
Better monthly payments
This will depend on what your goal is. Some people want to get out of debt faster – so they get a loan refinancing that allows them to pay more each month. This shortens their repayment period. But then there are people who want to lessen the strain that debt payments put on their monthly budget. These are the people who need a lower payment requirement. This can also be arranged depending on the loan that you will borrow. It will make the repayment period longer but it will make your budget more comfortable.
If all of these appeals to you, then you can opt for loan refinancing to get out of debt.
How to refinance different types of loans
Almost all types of debts can be refinanced. While the general idea and process are the same, there are a couple of details that differentiate one from another. This is why you need to take the time to get to know the details before you process.
Here are the various type of debts and how you can use loan refinancing on each of them.
Credit card debt
This is probably the most popular type of debt that is consolidated. First of all, it has a high interest that can significantly increase your debt within a short amount of time. Not only that, it does not have a structured payment plan. The only indication is to pay at least the minimum amount. And if you do that, it can take forever to pay it all off. This is why it makes a lot of sense to consolidate debt. Unfortunately, only 52% of those with more than $6,000 in credit card debt have consolidated. That means a lot of people have not felt the positive effects of consolidation.
When you use loan refinancing for this type of debt, you can use either a debt consolidation loan or a personal loan. The first one is specifically for consolidation purposes. The second one offers more flexibility. You can borrow more than what you need and use the rest for something else. Of course, that is not advisable because it will just grow your balance unnecessarily. You are best left to use debt consolidation loans.
Another type of debt that you can consolidate through loan refinancing is your mortgage. According to reports, a lot of the refinancing that happened during the last quarter of 2018 was not used to lower the interest rate. It was used for consolidating debts – specifically the high-interest debts. If you have enough home equity, you can use that to help consolidate debts. You can apply for mortgage refinancing to help restructure your payments. You can opt to make your 30-year mortgage into a 15-year one so you can get out of debt faster. Or you can do it the other way around so your monthly payments become smaller.
This works in the same way as a mortgage refinancing because you have collateral to use. However, the collateral, in this case, is depreciating in value. But if you think that it is enough to cover your other debts, then you can use this loan refinancing option. Most of the time, people refinance their auto loans to get a lower monthly payment. Make sure to check if you qualify for this. After all, there are many requirements to be approved of this loan.
This is one of the biggest debt problems of Americans – especially the Millennials. Although the interest rate is not as high as credit card debts, most borrowers have more than one. This is why this is the perfect candidate for consolidation. One of the popular ways to do that is student loan refinancing. The thing is, you can only consolidate student loans that come from the same source. You cannot mix federal student loans with private student loans. Consolidating federal student loans have a lot of requirements but it will give you a lot of savings. As for refinancing private student loans, you need a good credit score to get a low-interest rate. You can also opt to consolidate federal student loans with the private ones – but you will lose any benefits that you have with the federal loans.
Make sure you understand the loan refinancing details of the debt that you want to consolidate. This is what will help you make informed decisions about the debt solution that you will use to improve your financial position.