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Exploring Loan Options: Refinancing vs. Debt Consolidation

Exploring Loan Options: Refinancing vs. Debt Consolidation

As a business owner, you may have taken loans to jumpstart your business or expand it. However, things can get out of hand and you might suddenly find yourself struggling to keep your business afloat while also trying to meet loan repayments. If you're in such a situation, you might consider refinancing or consolidating your debt. Choosing between these two loan options for debt control can be a challenge for most people. But worry not. This article discusses what you need to know about the two options. You'll learn the benefits and challenges of each, helping you choose the right one.

Loan Refinancing

Loan refinancing is the process of renegotiating the terms of an existing loan to replace it with a new loan that has more favorable terms than the existing one. Once you refinance your loan, the original loan terms are replaced by the new agreement.

When you choose to refinance your loan, you could negotiate for reduced interest rates or stretch out the terms to make monthly payments more manageable. There are several scenarios where refinancing your loan will make more sense. They include:

  • Improved Credit Score

Your credit score will affect the interest you'll pay on your loan. If your credit score has improved since you took out a loan from providers such as Auckland loans or any other reputable local provider, refinancing your loan makes more economic sense as you'll end up paying lower interest.

  • Reduced Income

This is another scenario that calls for loan refinancing. Refinancing your loan allows you to renegotiate monthly payments. If your business is struggling or experiencing a slow season, you can ask for lower monthly payments in exchange for stretching the terms of your loan. Although you may pay more in the long run, it could help manage your finances when you have reduced income.

Benefits Of Loan Refinancing  

The following are the benefits of refinancing your loan:

  • Lower Monthly Payments 

Once you refinance your loan, you'll pay less each month. Hence, you'll have enough cashflow to be used in other aspects of your business.

  • Higher Credit Score 

Since loan refinancing allows you to enjoy better payment terms, you can likely repay the loan more consistently. Repaying your loan on time indicates that you’re a responsible borrower. In turn, this will improve your credit score and even leave a positive image for your company.

Despite the benefit of loan refinancing, it has one major disadvantage: prepayment penalties. Refinancing your loan makes it easier to pay off an existing loan as soon as possible. However, it's important to consider associated charges such as prepayment and processing fees. Thus, if you're not careful, you may pay the same amount in the long run.

debt consolidation

Debt Consolidation 

Debt consolidation is the process of combining multiple loans into one single loan. Unlike the previously discussed option, the purpose of debt consolidation is to simplify bills by combining multiple loans into one fixed loan payment.

The following are the major benefits of debt consolidation:

  • Simplified Finances 

You don't have to worry about multiple due dates when you choose to consolidate your debts. This is because you will only have to make one monthly payment for all your loans. It helps avoid late or forgotten payments, which could affect your interest and credit score.

  • Reduce Monthly Payment 

When you combine your loans, subsequent payments can be spread out over an extended term, reducing your monthly payment. However, it's important to determine how much you'll pay in the long run. You might be paying higher interest due to the extended loan term.

Depending on your lender, consolidated loans may come with additional charges such as annual fees, closing costs, and loan origination fees. For this reason, you must find out the associated costs and decide whether it makes economic sense.

Debt Consolidation vs. Refinancing

If you’re not sure whether debt consolidation or refinancing is the best for you, the following factors could help you decide:

  • Stability Of Income

Your business will have its fair share of ups and downs. If revenues have been dismal lately, it might be best to consider refinancing the loan. Refinancing is intended for borrowers who may have a hard time meeting monthly payments.

  • Number Of Outstanding Loans

Having just one or two outstanding loans is manageable. But what if you have to deal with three, four, or more? This means you’ll have to meet multiple due dates each month. Over time, it may be hard for your business to keep up. Hence, debt consolidation may be your best option if you have more than two outstanding loans.

In Summary

As mentioned above, sometime you might find it hard to take control of your debt. However, utilizing debt consolidation and refinancing may help you take control. Each option aims to simplify loan repayments for the borrower. There are certain circumstances where one option is better. The discussion above may help you decide.

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