The terms “consolidation” and “refinancing” are often used interchangeably, but they are not the same. It’s helpful to understand the difference.
Consolidating a loan refers to taking multiple loans and merging them, while refinancing involves swapping a current interest rate for a lower one within the same loan. Consolidating can also eliminate the hassle of making multiple payments every month and reduces the likelihood of falling behind or missing a payment.
However, consider these 4 factors before you consolidate your loan:
1. Your Income
If your total debt exceeds 40% of your gross income, consolidating may not be your best option. Consolidation isn’t a fix for all your debt problems and doesn’t answer the root cause of your financial troubles. For instance, if you are struggling with your debt because of overspending, consolidating won’t help with this issue. In fact, it may make it worse.
If your income can support it, and you can pretty much always have the cash flow to cover your monthly debt, then you may consider consolidation.
2. The Size of Your Debt
If you have a small loan, and you can pay it off in up to a year at your current pace, there’s really no point in going through consolidation since you won’t be saving that much money.
You’re better off going through different plans to pay off your debts, such as the snowball plan, where you start paying your debts from the lowest amount first and making minimum payments to the biggest.
3. The Additional Loan Period
Consolidating loans means benefiting from a lower interest rate; yes, it will most likely extend your loan by several years. This may mean that, in the long run, you end up paying a lot more than you initially borrowed.
And this means you need to take into account how stable your financial situation is. If you are comfortably paying off the loans now, will you be able to do so in a few years? Is your employment stable enough, or do you have sufficient savings to ensure you can pay off the loan if you’re unemployed?
4. The Interest Rates
Consolidation can help make budgeting easier for paying off your debt, but in the end, the most important factor you need to consider is the interest rate. Specifically, do you get a more convenient interest rate if you consolidate your debt? Or, do you need to pay any additional fees if you make this move?
Better Rate Mortgage Is Here to Help
If you’re still unsure if consolidating is the way to go, our team can provide expert advice to help you figure out what makes the most sense for your situation. Get in touch with us now, and let’s work together to find you the best financial solutions to your debt-paying needs!