Published in: Credit Cards | Oct. 8, 2019
By: Christy Bieber
Debt consolidation and debt refinancing can both help you deal with debt. But there are differences between the two.
Being in debt can be a major financial burden, especially when you have credit card debt at a high interest rate and much of your monthly payment goes toward paying interest rather than the principal. The good news is that there are techniques you can use to help you pay off your credit card debt or other loans more easily. Debt consolidation and debt refinancing are two of those techniques.
And although debt refinancing and debt consolidation can involve taking similar steps and have similar effects, they are not the same.
Although you can consolidate and refinance your debt at the same time, it's important to understand the differences between the two processes.
Both debt consolidation and credit card refinancing require you to take out a new loan. There are a number of different sources of financing you can use to consolidate debt, including personal loans and home equity loans. The availability of a new loan to either consolidate or refinance debt (or both) will depend upon your credit, income, and other financial details.
You can also get a loan that's specifically marketed as a "debt consolidation loan." These are sometimes available even to borrowers who don't have very good credit. But they can charge high interest rates and expensive fees, so you'll want to read the fine print very carefully if you're considering this type of financing.
Credit card balance transfers are an option for both debt consolidation and debt refinancing. When you do a balance transfer, you get a credit card that allows you to move other debt onto it. Usually, you can only move credit card debt onto the new card, but some card issuers will give you balance transfer checks you can use to pay off other loans. Balance transfer cards are especially useful for credit card refinancing because they make it so easy to transfer the balance from your old card to your new one.
Balance transfer cards usually offer a special low promotional APR, which could be as low as 0%. If you move the debt from just one old credit card onto your new balance transfer card to take advantage of the low rate, you are refinancing your credit card debt. But if you move multiple debts onto the new card -- either just from credit cards or from cards and other types of loans -- then the balance transfer card also makes debt consolidation possible.
There are also some differences between consolidating debt and refinancing it.
First and foremost, you can refinance just a single loan or a single credit card, whereas consolidation always involves combining multiple debts into one.
Consolidation loans from the government aren't available for credit cards. You always have to get a loan from a private lender or take advantage of a balance transfer if you want to refinance or consolidate credit card debt.
In many cases, you don't have to choose. You can get a new loan that both consolidates and refinances your credit cards or other loans. But if you have just one credit card or loan you want to change the terms on, then refinancing would be the right approach.
Both debt consolidation and debt refinancing can help or hurt your finances depending on the new loan you take out. You also need to make sure you have a plan to pay off the debt on time, otherwise you are just moving from one loan to another.
By making a plan to deal with your debt proactively and researching all your options, you can find the solution that is best for you and hopefully become debt-free ASAP.
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