Loan Consolidation vs. Refinancing: Which Is Right for You?
Like most places, UK consumer debt keeps rising – nearly £15,000 per household on average. From credit cards and overdrafts to personal loans and mortgages, monthly repayments stack up despite flat incomes. Making ends meet grows harder.
When your income no longer covers growing payments, taking action avoids financial disasters. Consolidating debts or refinancing loans on better terms are options to ease tight budgets. The right approach grants flexibility without damaging credit scores.
But how do Brits pick the best debt repayment method for their situation? Is consolidating best, or should I refinance existing debts? Both promise simpler payments but take different routes to help cash flow.
This blog shares key information on consolidation versus refinancing differences.
What Is Loan Consolidation?
Loan consolidation combines loans into one. Multiple student loans or credit cards turn into a single loan. This makes managing debt easier.
Consolidating aims to:
- Reduce the complex logistics of tracking many loan payments
- Provide possible interest rate discounts
- Leads to lower overall monthly payment
Consolidation loans also mean consistent interest rates. Even if an original loan had variable rates, the consolidation loan locks in fixed rates. No more fluctuating payment amounts.
Consolidation grounds debt repayment.
You get one payment date, even dollar amount and interest rate for the life of the loan. Things simplify with a consolidated view of what you owe.
What Is Refinancing?
Refinancing replaces an existing loan with a completely new one. The old debt gets paid off and swapped with a freshly structured loan.
For example, let’s say you have bad credit now but got a personal loan years ago at a 9% rate. Today, with better credit, you could potentially qualify for instalment loans for bad credit from direct lenders at just 5%.
Refinancing core aspects include:
- Interest rates – The refinanced loan often has lower annual percentage rates, saving money long-term.
- Payment amounts – A new loan could offer lower monthly payments.
- Loan amount – You can increase or decrease how much you borrow.
- Loan term length – The repayment timeline could get extended or shortened.
The exact refinancing impact depends on the specifics of the new loan. However, the goal is to upgrade from old loan terms that no longer fit needs or budget.
Interest Rates and Terms
| Feature | Loan Consolidation | Loan Refinancing |
| Interest Rate Type | Weighted average of existing loan rates | New rate based on creditworthiness |
| Typical Interest Rates | Same as current loans, no reduction | Can be lower or higher than current loans |
| Fixed vs. Variable Rates | Fixed | Fixed or variable |
| Loan Term | Extended based on total balance (up to 30 years) | Based on new terms set by the lender (5-20 years) |
| Potential Savings | Minimal to none | Significant if the new rate is lower |
| Monthly Payment Amount | Can be lower if the term is extended | Can be lower if the rate is reduced |
Are You Struggling with Multiple Payments?
When you have several loan payments, things get complicated quickly. Hard-to-miss details include:
- Paying varying amounts to multiple lenders
- Keeping track of different due dates
- Monitoring if terms like interest rates change
This complexity leads to frequently slipping up. You might miss payments and damage credit or lose track and overpay interest costs.
Consolidation means no longer jumping between loan accounts. Just make one payment on the same date every month for an established amount and rate. This eases money management.
How Do Loan Terms Compare?
Consolidation and refinancing ultimately do the same thing – replace old loans with new terms. But the outcomes vary in key ways:
Debt Consolidation:
- Often extends repayment timeline, which lowers monthly costs
- Locks in fixed rates for the life of the loan
- Total interest paid over loan lifetime may increase
Loan Refinancing:
- Shortens the length of the loan
- Could feature adjustable rates
- Has the potential to lower your total interest costs
Consolidation offers payment stability. But you pay off the balance over more years. Refinancing accelerates payoff, which aids total cost. But the terms stay fluid.
Got bad credit but need to refinance? A 5k personal loan for bad credit can help. With poor credit, extra cash lets you pay down cards or loans charging high rates. This shrinks debts owed to just one monthly bill with better terms. Paying on time then starts rebuilding your score.
How Will Each Option Impact Your Credit?
Applying for a fresh consolidation loan or refinanced loan causes a small credit score drop when lenders check reports. However, once approved, both options actually boost long-term scores through diligent payments.
Consolidation supports credit by:
- Streamlining multiple payments into one simple monthly bill. Avoid late fees or gaps that hurt scores.
- Extending repayment timelines provides flexibility if money gets tight. There is a lower chance of missed instalments while paying off the balance.
Refinancing also encourages credit health:
- Lower interest rates mean more payment going to the principal. Faster debt paydowns reflect positive.
- Shows progress by upgraded loan terms since origin. Displays financial responsibility.
Both should help credit scores if consistently paid on time. And the application dip usually rebounds within months after acceptance. Just stick to regular payments.
Conclusion
Choosing between consolidation or refinancing depends on you. Your income, debts, and credit change which works best. While this guide shares the main differences, your details matter most.
These choices make big money changes. Before picking, talk to credit counsellors. They know debt payments well. Counsellors can confirm which option fits your situation better. Their personalised advice gives confidence as you take control. Stay active in figuring out the next steps. Ask for help when needed.
Ailsa Adam is the Editor-in-Chief and former content head at Hugeloanlender. She has been a valuable member of the content strategy team since 2017 due to her abundant experience in the finance sector. Passionate about helping individuals navigate the world of loans and personal finance, she has dedicated herself to acquiring extensive knowledge on various financial products. Before her role at Hugeloanlender,
Ailsa worked as a seasoned journalist and writer, specialising in creating informative blogs and articles on diverse loan types. She is known for her meticulous research and commitment to delivering accurate and engaging content. She holds a degree in MBA Finance and has a keen interest in creative writing and art.
