CloseIf you are wondering if you can refinance a debt consolidation loan, the answer to that is a big yes. This is still a loan like a mortgage or a personal loan. If you want to change the terms of the old loan, you can also do so through refinancing.
Maybe you should not be asking if you can refinance a debt consolidation loan or not. It is more important to ask if it is the right thing for you to do. The most common reason to refinance any loan is to get a lower interest rate. While this is a valid reason, it should not be the only focus. You have to remember that there is more to your debt than the interest rate. When you refinance or consolidate, you are going to get a new loan. That would mean the lender will pull out your credit report and go through the usual underwriting process. This entails costs which come in the form of origination and application fees. You have to make sure that your reason to refinance will make it worth the money you will spend to get the new loan.
How is refinancing different from a debt consolidation loan?
Some people get confused because they think that these two are one and the same. The truth is, refinancing and consolidating have similarities but their difference is also quite distinct.
Similarities
First, let us discuss how these two are similar. Both of them will allow you to change your old debts into a new loan. You can use an unsecured loan or a secured loan for both of these options. The reasons to refinance and consolidate are also the same. Usually, borrowers want to change or improve something about their debt situation. The new loan usually has that improvement. It can be a lower interest rate. It can also be a longer or shorter term. You can also work out to remove some of the fees and charges that you once had in your old debts.
Differences
The main difference of a refinancing loan and a debt consolidation loan is actually simple. When you consolidate, you need to have multiple debts. One of the reasons to consolidate is to simplify your overall payments. With refinancing, that need is not always true. While refinancing can involve multiple debts, it is not a necessity. It is possible to go through refinancing even if you only have one loan.
The truth is, these two can be used interchangeably. You can consolidate a refinanced loan and you can also refinance a debt consolidation loan. As we said, the question is not really whether it is possible to do it. The real question that you should be asking yourself is whether it should be done at all.
What are the signs that you should refinance debt consolidation loan?
When you use debt consolidation loan, you merely arranged your debts so you have a more simple repayment plan. It is all done at the beginning of the journey. You have every right to change your strategy in the midst of the payment term if you feel like it will be most beneficial to you. One of the strategies that you can use in the midst of a debt consolidation loan repayment term is refinancing.
There are three important signs that you can refinance your loan.
If you have an improved credit report. If you borrowed your debt consolidation loan with a less than stellar credit score, you were probably not given the best terms. Assuming that you paid this loan properly and you did not add any more debt, you should have a better credit score after a couple of months. If your score jumped significantly higher, you can expect to get a better offer from a lender if you tried to apply for a new loan. Since you have a lower balance now, it should be easier for you to get a new loan.
If the current interest rates are low. The Federal Reserve announces if the interest rate increases or decreases. Whatever they do, you can expect that banks and other financial institutions will follow. If the rates are lower, that means the interest rate on new loans will be lower too. You can take advantage of this by applying for a new loan. If you have a fixed interest rate, that rate probably followed the market index when you initially applied for the loan. In case the index is lower now, the new loan will naturally follow that. You can also take this chance to change your interest rate from a variable into a fixed rate. This will take some research and analysis on your part. If analysts think that the market rates will go up, you may want to change your variable rate into a fixed rate.
If you want to change your payment terms. There are many changes that you can do to your payment terms. You can choose to shorten the terms so you can get out of debt faster. A shorter term means you have to pay more each month. If you just got a salary increase, you can use the extra money in your budget to pay off your debts. In case the opposite happened, wherein your salary was compromised, you will need a lower monthly payment. Refinancing will help you get this lower payments. Of course, you have to remember that a lower payment means you have to stretch your terms. That will make you pay more on the loan as a whole.
These three are valid signs that you should refinance your loan. Of course, you still need to analyze your financial position and other expenses to see if you should refinance or not. Take your time and consider all the options before you make a final decision.
When should you avoid refinancing debt consolidation loan?
There are cases wherein refinancing your debt consolidation loan is not a good idea. If there is really nothing wrong with it, you should probably just leave it as is. If you know that you can afford to pay it off completely, then keeping the loan in its present terms should be alright. This is especially true if you are more than halfway towards your loan payments. Here are some of the other signs that will tell you not to refinance your loan.
If you are only doing it so you get more room for debt. Let us assume that you wanted to make your payment lower. That is okay but only if that is caused by a recently compromised income. However, if you only want to do it because you want more room in your budget so you can use your credit card, this is not an acceptable reason. You should just leave your debt consolidation loan as is and continue paying it based on your usual terms.
If you are not sure how you will pay it off. This is actually a reason not to borrow any debt – much less to refinance an existing one. If you are no longer sure how you will pay off the debt that you currently have, refinancing is not the solution to your problems. You might need something more drastic like a debt reduction. In case, you will need debt settlement. It is a debt relief program that involves negotiating with your lender to allow you to pay only a portion of the balance. If you need help with this, you can call number #1 debt consolidation company, the National Debt Relief. There are debt experts waiting to help borrowers like you. The initial consultation is free and you will not be obligated to sign up for anything. Talking to a debt expert can help you make the right decision about your financial situation.
If you do not understand the new terms. The final reason not to refinance your loan is when you do not understand the terms that are being given to you by the new lender. Make sure you ask the lender about it before you sign up for anything. If the concept of refinancing is not clear to you, do your research. Do not just go into it just because someone told you that it is a good idea. Analyze your own financial situation and calculate the costs involved when you refinance. Remember that you will be paying a new set of application and origination fees. You have to understand all of these and the effects that it will have on your finances. Unless you have this firm understanding, you should not refinance at all.
What are the steps to refinance a debt consolidation loan?
Refinancing your debt consolidation loan can be confusing if you do not know the steps that you need to follow. Here are our suggested steps so you can approach this refinancing strategy wisely.
Step 1: Analyze current loan. The first thing that you have to do is to look at the debt consolidation loan that you currently have. Why do you want to change it? What exactly are the areas in this loan that you want to change? Is the interest rate too high? Are you having a hard time meeting all the payments? These are important questions and considerations that you need to look into. When you understand your debt consolidation loan, you will know what kind of refinancing you need to improve your debt situation.
Step 2: Look at your credit report. The second step involves your credit report. Refinancing involves a new loan. Naturally, it will look at your credit score to gauge your creditworthiness. If you have a high credit score, you are a low-risk borrower. That means you can be given a low-interest rate on your loan. If you have a low credit score, that is an indication that you are a high-risk borrower. You will be given a higher interest rate. That will make your loan more expensive. If you can postpone refinancing, it is advised that you work on your credit score first.
Step 3: Check if you can consolidate more debts. There may be debts that you have that can also be consolidated when you refinance. This is a great time for you to simplify your overall debt payments. Review all your bills and statements to check if this is possible. There may be debts that have high interest rates. Take advantage of the low rates that you will get from refinancing.
Step 4: Research lenders. Based on your credit score, you should look at the lenders that can offer you the best rate and terms. You can do your research on well researched debt consolidation reviews. There are lenders who can offer the best rates despite a low credit score. Or they can give you better terms if you have a high credit score. Make sure that you understand the types of loans that are available to you so you can make a smart choice about refinancing.
Step 5: Narrow your lender choices to 3 or 4. With the research that you did, you have to choose the best 3 to 4 lenders that can give you an ideal refinancing loan. Apply to all these lenders. Do not worry about the multiple hard inquiries on your credit report. If it is within a short span of time and it is one type of loan, it will be considered as one hard inquiry. That will not affect your credit score that much. When you apply to multiple 3 lenders, you will get more options. You can pick which of them offers the best loans. Pay attention to the rates and the fees. Look into their customer service reputation as well.
Step 6: Choose the right loan that meets your needs the most. When you have the offer from the lenders you applied to, study them carefully and make a thorough comparison. Go beyond the interest rate when you are studying the offers you got. Sometimes, low-interest rates are offered by companies that charge high fees and charges or have a bad customer service reputation. Balance all these out before you make a choice.
How can you be successful at refinancing debt consolidation loan?
There are a couple of rules that you need to follow if you really want to refinance your debt consolidation loan.
- Make sure you have a better credit standing. Having a good credit score is the best way for you to improve the rates and terms on the refinanced loan. It is not the only factor to consider but it is a significant one.
- Borrow only what is needed. You will only be adding to your debt if you borrow more than what is necessary. Unless you have other debts that you want to consolidate or that extra money will be used on something that will make you earn more, just stick to what you need to refinance.
- Keep a tight lid on new debt. As mentioned, keep your debts down. Do not use your credit cards because that will only add more to your balance. If you are more than halfway through the loan you are paying, that is the only time that you should consider using more credit. And make sure you be wise about its use.
- Have a repayment plan ready. Before you refinance, draft how you will repay it. Do not apply for a loan if you have no idea how much it will cost you to pay it each month.
Follow these rules so you can refinance your debt consolidation loan smartly. Remember that you can always get in touch with a professional to help you with your debt situation. Do not go into something that you know you do not fully understand. Take your time and do your research well – especially when it comes to your own financial situation.
