Using a personal loan to consolidate or refinance debt presents a great opportunity to save money on interest and get debt-free faster. Yet many consumers aren’t quite sure how personal loans solve these problems, or how debt consolidation and refinancing work separately and together.
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What is Consolidation?
Debt consolidation, through a personal loan, allows a borrower to pay off multiple existing debts (like debt balances from different credit cards) for the purpose of a new, single loan. The personal loan lender provides the funds for the consumer to pay off their multiple debts, and then moving forward the borrower will pay the lender a fixed monthly sum over the new term (or length) of the loan.
When is Consolidation a Good Idea?
Consolidation makes sense if a person stands to save money on interest, lower their monthly payment or simply better manage their debt through one fixed monthly payment. If the average APR (annual percentage rate) of their existing debts is higher than an APR they could qualify for on a new loan, they can potentially save money.
Most often though, consolidation is for simplifying debt, by creating one easy-to-remember monthly payment that is typically lower than the borrower’s previous combined debt payments. Since the loan repayment plan will be stretched over a longer period, however, a borrower stands to pay more in total interest over the life of a loan, even if they get a lower APR. If you’re planning on consolidating debt, use Fiona for pre-qualified loan offers from top providers.
What is Refinancing?
Refinancing with a personal loan is similar to consolidating in its quest to simplify debt. However, rather than a borrower converting multiple debt payments into one monthly loan payment, refinancing focuses on taking one debt and replacing it with a loan that offers preferable terms to the borrower. Whereas consolidating is many to one, refinancing is one to one.
When is Refinancing a Good Idea?
Typically, the goal in refinancing should be to create a more attractive repayment plan for the borrower, whether it’s lower interest or a lower monthly payment. The key in applying for a personal loan to refinance debt is to calculate the potential overall savings, accounting for fees, to see if it makes financial sense. There’s no use in refinancing if the net result doesn’t improve the borrower’s current financial situation.
It’s important to know that refinancing and consolidating aren’t mutually exclusive. If someone wants to combine multiple debts into one payment, and improve the terms of their debt repayment, there are personal loan options out there. The higher a borrower’s credit score, the better offers they’ll receive based on APR.
Using personal loans for debt consolidation and/or refinancing can be a sensible financial move. The question is whether the terms and rates offered by the new loan improve upon those of the existing debt. Whether a person’s aim is to save money or buy time with lower monthly payments, personal loans present the opportunity to do so.
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