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Debt Consolidation vs. Refinancing: Which Will Work for You?

The economic situation in the U.S is far from ideal and most households and businesses are grappling with ballooning debt. According to the Federal Reserve Bank of New York and the Census Bureau, the average credit card debt in American households now stands at $16,061 according to a report aired on CNBC in December 2016. The average household debt in total, including mortgage and auto loans, stands at $134,643 according to the 2016 American Household Credit Card Debt Study.

Debt Consolidation vs. Refinancing: Which will work for you? : eAskme
Debt Consolidation vs. Refinancing: Which will work for you? : eAskme
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In this prevailing situation, it is understandable that both business and household owners are seeking quick solutions to get out of the debt rut. Debt consolidation and refinancing are the best known solutions to spiraling debt today and credit counseling agencies are always at hand to guide you on how best to exploit these strategies in managing your debt burden.

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In most cases, consumers are servicing multiple debts including student loans, auto loans, mortgages, credit card debt, taxes and many others. In such a situation, it is highly likely to default and this leads to more financial trauma. Refinancing and loan consolidation can help avert such a situation. For companies consolidation your debts also helps avoid bankruptcy and loss of reputation.

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However, it is imperative to understand how each of these financial strategies works in order to make an informed choice. This guide will elaborate some of the pertinent issues surrounding handling debt through refinancing and consolidation.

Avoiding Debt Relief Scams

A quick search on a search engine for debt solutions will give you thousands of results and this is where things get tricky.  There are also millions of financial experts out there promising to wipe off your debts within no time.

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It is no wonder then that a similar search for debt relief scams will also give you thousands of results from consumers who have been duped into such scams and ended up being financially devastated. In every financial decision you make, always make sure you are fully armed with the right information to avoid these pitfalls.

Debt Consolidation Explained

Consider a situation where you have multiple debts including credit card bills, auto loan, student loans, and unsecured personal loans among others.  In such a situation, servicing all these debts can be a daunting and tedious task. You have to follow up with multiple creditors and sometimes you will inadvertently fall behind on repayments.

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You will also have to deal with collection agencies that are best known for their persistent and sometimes irritating calls. Debt consolidation works by enabling you to bundle all your loans into a single loan.  A debt consolidation company gives you a larger loan to settle all the multiple debts and you will henceforth be dealing with one single payment.

Debt Refinancing in Brief

While this is a similar financial product to debt consolidation, the goal here is primarily to lower your interest rates. Debt refinancing can involve transferring your debt to a home equity loan or to a 0% or lower interest rate credit card.  A refinancing company can also offer a new loan at a lower interest rate and better repayment terms.

Say, for instance, you are servicing a mortgage at, say, 15% interest rate but the interest rates in the market have fallen to 11%. You can leverage these better terms by negotiating with a refinancing company which will offer a completely new home loan at a better rate. Debt refinancing gives you more leeway to negotiate the best rates in the market.

What to consider in Debt Consolidation and Refinancing

While debt refinancing and consolidation are considered the best financial strategies to get out of debt, there are some things to consider before making your decision. Below are some of the factors which you should consider:

1.    Ask about the type of debt consolidation being proposed

In some cases, debt relief programs lure consumers only to change the terms later. It is important to note that in debt consolidation, there are no negotiations with your creditors and instead, all smaller debts will be fully repaid and you will have a new bigger loan to service. Debt consolidation is not debt management or settlement. If a debt consolidation company mentions these two strategies, keep looking.

2.    Take time to do the math

However promising the interest rates offered by a debt refinancing or consolidation company may be, never rush to sign up. Take your time to consider how much you will be paying at the end of the day. Refinancing and consolidation should alleviate your debt burden and hence the interest rates must be lower and the payment terms more flexible than those of your current loans.

3.    Research the loan company

The loan provider should be licensed and must have a good reputation. Go online and read reviews and testimonials from other consumers before choosing one company. Ask for referrals from other business or household owners who have used these services before in order to identify the best lender.

4.    Avoid companies promising to wipe your debt

It is important to appreciate that the loan agreement is a legally binding contract. As such, there is no way out of it other than by repaying your loan. Scammers will promise to negotiate with your creditors but this will only ruin your credit score further.

To find the best refinancing and Las Vegas consolidating companies, check whether they are registered with National Foundation for Credit Counseling (NFCC) and the Financial Counseling Association of America (FCAA).

To Refinance or Consolidate?

If you have several loans, you can easily consolidate to settle them and only have a single loan to service. If you have a single large loan with a high interest rate, refinancing is ideal to help you negotiate a lower interest rate and a better repayment package.

Conclusion

Handling multiple debts is not an easy affair but you can consolidate or refinance to get some relief. These two strategies work best if you also create a new financial budget to avoid falling into the same debt trap in future. It is advisable to choose the best financial company to work with to avoid falling for a scam. More importantly, take time to go through the contract you sign and get clarification on any clause that is not clear.

Author Bio

Isabella Rossellini is a financial consultant specializing in small business enterprises (SMEs). She has written articles on how a companies can consolidate debt to avoid bankruptcy. She boasts many  years’ experience in the industry.