Should I refinance or consolidate my debt?
The answer depends on what works best for your individual financial situation. It’s important to understand what each option means so let’s start with the basic differences. Put simply, debt consolidation allows you to pay off multiple debts in one simple payment, and refinancing is a potential strategy for someone who already has a loan.
Let’s take a closer look at the details.
What Is Debt Consolidation?
Debt consolidation is a financial strategy through which you combine multiple debts into one.
If you’re paying off multiple debts such as credit cards or store cards, a car loan, medical bills and/or personal loans, you’re receiving several bills every month, often at different times of the month. Your terms and rates will likely vary by creditor. Depending on the type of debt you carry, interest rates could differ (or change entirely if you have an introductory APR), payoff dates could be years or just months away and paying a debt off early may incur a penalty. All of these variables can make it difficult to plan your payments and manage your finances.
Debt consolidation simplifies how you pay your bills and may help you gain better control of your financial situation.
Here’s how it works.
When you receive a debt consolidation loan from a reputable lender, you can use those funds to pay your creditors directly. Not only will this simplify paying off your debt, but you could potentially save hundreds (or even thousands) of dollars on interest payments from higher interest debt.
Your debt is centralized with one lender. You pay your established lender over time until your debt consolidation loan is paid in full. Not only does this strategy make paying off multiple debts easier and more organized, it also offers the benefit of flexible repayment terms and potentially lower interest rates than other forms of debt. Discover offers a free debt consolidation calculator to estimate your savings from consolidating higher interest debt.
What Is Refinancing?
Refinancing is a financial strategy that allows you to receive more favorable terms on an individual loan.
If you have a loan and have been making your monthly payments on time and in full then you might want to explore refinancing. Why? As you continue to pay down the balance, you may be able to get a lower payment, lower interest rates or a shorter term depending on your specific situation.
Here’s how it works: If you’re paying your current loan on time every month, you may be improving your credit history. A favorable history is a positive mark on your credit scorecard, which can lead to reputable lenders giving you more favorable rates and other options.
Curious about your credit health? Discover customers can check their credit scorecard for free.
It’s important to remember that refinancing means applying for a new loan. Also, you are not required to refinance your loan with your current lender. Do shop around for the most favorable terms, whether with your current lender or a new one.
The bottom line
Both debt consolidation and refinancing can be effective strategies for managing your debt. Ultimately your personal financial situation should drive your decision.
If you have one loan to manage, it may make sense to explore if refinancing it will provide better loan terms than what you currently have. If you have multiple debts with high-interest, debt consolidation can help by combining those bills into one set monthly payment with a fixed term and fixed interest rate.
Pay off your debt with a Discover® personal loan, a NerdWallet 2020 winner for best personal loan for debt consolidation.