Refinancing and Consolidating – that’s the same thing right?
Interestingly, many borrowers and lenders alike tend to use the terms “refinancing” and “consolidation” interchangeably – but the fact is that they actually aren’t the same thing.
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Though they do share similarities, there is one fundamental difference between debt refinancing and debt consolidation loans: the number of loan(s) that are actually affected.
For refinancing specifically, a borrower will take out a new loan at a lower interest rate in order to pay off a higher interest rate loan. Debt consolidation, however, is when a borrower takes out one loan in order to combine multiple outstanding loans into one lump sum.
Refinancing:
Taking out one new loan in order to pay off one existing loan.
Debt Consolidation:
Taking out one new loan in order to pay off multiple existing loans.
In short, debt consolidation loans (also referred to as business loan consolidation) will always be a form of refinancing, but refinancing cannot be a form of debt consolidation.
When might somebody use refinancing or debt consolidation?
Refinancing is typically used to lower the interest rate on an outstanding loan. Either interest rates were very high at the time of the initial loan agreement, or due to poor credit, could only qualify for an expensive loan product. Now, perhaps the borrower has done some research and has found a new lender who would offer a lower rate.
Debt consolidation loans are typically taken out for a number of reasons. Sometimes a borrower is also looking to take advantage of lower interest rates, while other times a borrower simply finds dealing with multiple loans to be too stressful and would rather just pay one amount to one lender per month.
Regardless of the reasoning behind seeking out refinancing or business loan consolidation, there are alternative lenders who specialize specifically in the art of small businesses and their individual needs.
