Understanding Debt Consolidation and Refinancing

Consolidation is the term used to mean putting together several similar things into one banner. And here in finance, a consolidation of the debt means to transfer the debts of various business loan accounts into one single account wherein you will have to pay a relatively lower interest rate.

What is refinancing?

Refinancing is the term used for getting a new loan arranged to close an old existing loan. Refinancing is done so that the old loan which was at a higher interest rate can be closed and you may start afresh with the new lender with fresh records at a lower rate of interest. This happens when the new lender kind of buys your old loan and starts a new loan account for you in their company.

What are the differences between refinancing and debt consolidation?

There are differences between the two. Refinancing occurs when you are closing one old loan through a new loan at a lower rate of interest. Debt consolidation occurs when you are closing multiple old loans through a single new loan at a lower interest rate. This means both are similar activities, and involves debt management in a smart way.

But, consolidation is a better option when you are torn off between many creditors and are getting puzzled to pay off the debts on time due to poor business performance and poor management of finances. This means that both are means of refinancing, but a refinancing is not always necessarily a debt consolidation unless it involves closing of multiple old loans.

Now that you know the difference between the two, you must have decided that you want to go for a debt consolidation loan since you are actually torn between handling of the several business loans, credit card debts etc., and need a permanent one-stop-solution. And these are the probable reasons that you badly need a debt consolidation.

You did not understand the terms and conditions while getting the loans

When you had to start the business, you were happy and excited. At that time the only things that mattered for you is to materializing your plans and get the business rolling. In the process, you naturally resorted to as much financing as needed, and thought the least of counting how many loans you are getting into, and what their tenure, interest rates and conditions are. This is a big mistake that many business owners make. Without understanding the terms and conditions of the loan thoroughly you get into one. And finally you discover that the effective APR of the loan is actually higher than you thought it to be. It’s in such a scenario, that you may think of managing your multiple business loans by transferring the highest interest paying loans into refinanced loans, or even better by transferring all debts into one new loan.

It was just a timely compulsion

It may also have had happened that you took the high interest loan not in ignorance, but out of compulsion with full knowledge of the terms. It happens in businesses when you are suddenly in a crunch, and need cash anyhow. Then you do not look at the rates or terms, and you simply go for a high interest loan. Later when you pass through the phase, and can better handle the situation, you think of refinancing or a debt consolidation in case of multiple high interest loans.

The right candidate to get a debt consolidation approved

As you are preparing to go for a debt consolidation, one question may definitely come to your mind. Are you the right candidate to get a consolidation loan? What if you are not? To understand it better, read on to know more what makes a good candidate for getting debt consolidation.

  • If you have multiple loans and debts from various companies, investors etc., then you qualify for debt consolidation.
  • If most of your loans are taken at high interest rates, or a few are at exorbitant interest rates, then you must bring them down them to a feasible low interest rate, and you would need a debt consolidation for that.
  • Sometimes you take short term loans in crunch hours, and later when you have balanced the situation somewhat, you look for healthier options that give you a long tenure to pay back at a low interest rate. This is when you need and would get a debt consolidation.
  • A good credit score rating is always a perk when you are applying for loans, and especially when you are trying to consolidate your loans. Here you must know that you are the best candidate if your credit score is above 700. In case it is between 550 and 620, you still qualify for some low interest rate loans. However, a score below 500 puts you in a tough situation to get a loan at a low interest rate.

Finally

The final calculations reveal it all. If your see after calculating your current  and loan monthly interests accumulated together that your new loan interest at a lower rate would help you pay much lesser, while give you a longer tenure to pay back the loan, then you will be at profit from all respects by opting for debt consolidation. It is then that you should think of refinancing in case of one loan, or debt consolidation in case of multiple loans.

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