Debt Consolidation Loan is Different from Credit Card Refinancing: When to Select

Utilizing a credit consolidation loan to refinance credit card debt may reduce the interest rate on your loan or lower your monthly payment.

If you’re in high-interest credit card debt, consolidating your debt can save you cash and pay back the balances quicker.

One method to accomplish this is to use personal loans, usually described as debt consolidation or refinancing credit cards.

What you need to be aware of about debt consolidation vs. refinancing your credit card:

  • What exactly is credit card refinancing?
  • Credit card refinancing vs. debt consolidation
  • Credit card refinancing vs. balance transfer cards
  • What is the best option between refinancing credit cards or balance transfer credit cards?

What exactly is credit card refinancing?

Refinancing your credit card is when you get personal loans to pay off the outstanding credit card balance. You’ll have just one credit card and one repayment to make.

If you qualify for an interest rate or want to lower your monthly installments and reduce your monthly payment, refinancing your credit debt may be a good option.

However, it’s essential to think about both the advantages and disadvantages of refinancing your credit cards before deciding whether it’s the right option for you.

Pros

  • It could lower the interest rate you pay: based on your credit score, you may be eligible for lower interest rates than you’re currently paying. This can save you the cost of interest and could even allow you to pay off your loan more quickly.
  • Reduce your monthly payment: If you choose to extend the repayment period by refinancing, you can reduce your monthly payments by decreasing your financial budget’s stress. Keep in mind that the more extended repayment period will mean you’ll have to pay more interest over time.
  • Refinancing multiple credit cards allows you to combine the credit card debt into one, making your debt easier to manage.

Cons

  • It may be challenging to get a loan in the event of bad credit: You’ll typically require good to excellent credit to be eligible for personal loans. Some lenders will offer debt consolidation loans to those with bad credit; these usually have higher interest rates than credit with good credit.
  • The loan could also be subject to fees. Specific personal loan lenders charge fees like origination fees that can add to the total cost of your loan.
  • This doesn’t mean that debt is reduced: Even though you could pay less interest, you’re still accountable for the entire amount of your initial debt. In addition, you may be in debt once more later on if you do not change your financial habits.

If you choose to take an individual loan to consolidate your credit cards, It’s crucial to consider how much the loan will price you shortly. In this way, you’ll be able to plan for any extra costs.

Credit card refinancing vs. balance transfer cards

Another option to consolidate your credit card debts is to use an account that transfers balances. Instead of taking out personal loans to pay off your previous credit cards, transfer the balances onto a new card.

How do you choose between refinancing credit cards and balance transfer cards?

While both refinancing credit cards and balance transfer cards may be used to consolidate debts, There are some circumstances where one could be more beneficial than the other.

Here are a few scenarios where refinancing a credit card could be a viable option:

  • It is important to consolidate many types of debt. Suppose you have other types of debt that aren’t credit cards that would like to be consolidated, for example. In that case, medical debt or other loans you should consider, a personal loan to consolidate debt is better.
  • You may be able to get lower interest rates. Personal loans typically have less interest than a credit card. This can make a debt consolidation loan an ideal choice if you wish to get the most savings on interest while also getting rid of your credit card balance.
  • You’re in the market for a monthly fixed payment. Personal loans typically have fixed interest rates, meaning that your monthly payment will never alter.

However, a balance transfer card may be a better option if:

  • It is possible to get a credit card that has an APR rate of 0. If you can avail of an introductory 0% APR period for the balance transfer card, you can avoid paying any interest. Be aware that you’ll need to settle the balance at the time that this period expires.
  • You’re not owed a lot. If you’re carrying a lower amount of balance and choose a card that has 0% APR, You could have the advantage of paying off your credit card on time so that you don’t end up with interest-related charges later on.
  • You’re looking to get rewards. Certain balance transfer cards provide rewards, such as points, cashback, or miles. Be careful, however, that if you’re intent solely on earning rewards, you may find yourself further in debt.

If you choose to take personal loans to consolidate credit cards, make sure you consider the most lenders you can to locate the perfect option for you. This is simple using IPASS, and you can compare prequalified rates from a variety of lenders in just only two minutes.

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