Refinancing Vs. Consolidating Your Debt

A question that is often asked is what the difference is between refinancing a debt and consolidating a debt. Here we try to give you a brief overview and comparison between these two debt relief methods.

Refinancing your debt

As the name suggests, refinancing your debt is where you renegotiate the terms of your existing debt with your existing creditors. Typically this involves:

- renegotiating the term of the repayment (to extend it);
- renegotiating (if possible) the interest payable (to reduce it);

Refinancing your debt in this way you should be able to stay on good terms with your existing creditors, not worry about any bad credit rating score, and still make less monthly repayments than you were before!

Consolidating your debt

When you consolidate a debt you typically approach a new lender and ask them to lend you a lump sum of money which you then use to repay all of your existing debt. Once you have consolidated your debt you then only need to make payments once a month to your new creditor. If this is done right, the repayment to your one creditor should be less than the sum of all your small repayments.

Refinancing Vs. Consolidating

Most financial planners prefer refinancing debt over consolidating debt as it usually involves fewer fees. What this means is that most creditors will ask a debtor to pay a fee if they make early repayment of the debt. When you consolidate a debt you effectively repay lots of small debts early. So, typically, they'll be lots of early repayment fees. However, keep in mind that your creditors will also likely ask that you pay fees for arranging to refinance your debt.

As well as this, when you consolidate a debt you need to be careful that you are not:
- providing any new security to the new lender;
- not agreeing not to repay the consolidated loan early, or else you'll pay early repayment fees;
- don't end up paying more in fees than you would have done in interest on the debt.

On the other hand, consolidating debt does give clarity that refinancing lacks. In a refinancing you still have the same number of creditors you have to repay. Consolidating your debt does away with this burden.

Overall then there are positives to both refinancing and consolidating debt - both of which are strongly suggested over continuing to suffer the stress of a spiraling debt burden you cannot repay!

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