When a person falls into debt, he has options as to how he can manage this debt. If the person has a home loan, he may be able to refinance the loan into one with terms that are more manageable. If the person has multiple outstanding debts, he may also be able to trade these debts to a finance company, which will issue him a single, large loan. These options have various advantages and disadvantages.
Refinancing
Generally, an individual will seek to refinance her mortgage to get better terms on it. In some cases, the individual may be able to get a loan with a lower rate of interest, which can save her a large amount of money over a long period of time. In addition, the individual may be able to restructure the loan so she pays less each month, making the loan more manageable.
Debt Consolidation
When an individual consolidates his debts, he is essentially combining multiple debts into one single debt. The company that issues this new loan will generally seek to make a profit off it. However, in exchange for taking on more debt, the person may be able to pay a smaller amount each month. This can, as with certain kinds of refinancing, make his debt load more manageable in the short term.
Advantages
Refinancing a mortgage can be beneficial if it saves a person money. In addition, if the person is struggling to pay the mortgage each month, then reducing the size of monthly payments may be able to save her from falling behind on her payments. The same is true of some debt consolidation loans, which may allow a person to pay less. Also, debt consolidation loans can make debt payment simple, as the person is paying a single creditor rather multiple creditors.
Disadvantages
The chief disadvantage to refinanced mortgages is that the person may not save money. For example, if the person takes out a new loan in which he pays less per month, the total size of the loan may increase. In addition, it costs additional money to refinance a loan, in the form of fees paid to the new lender. Similarly, debt consolidation companies may charge an individual a higher rate of interest than he was paying before, as well as additional fees.
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