Refinancing and consolidation loans are often juxtaposed as two names of the same offer – but this is not true. These two types of loans are something completely different, although they work on a similar principle and they are supposed to help us repay our obligations under more favorable conditions. But what are they different from each other? Which form of loan – refinancing or consolidation is better?
What is a consolidation loan?
The offers of consolidation loans are very popular and often encountered. It’s nothing more than combining all existing liabilities into one , thanks to which you have one instead of several loans. It also allows for unification of the interest rate.
It works in such a way that the bank repays all the borrower’s obligations, at the same time granting him a new loan, which is the sum of all existing debts.
This allows you to combine in one very different financial offers, such as cash loans with housing loans or other forms of credit, including credit card debt. The big advantage is undoubtedly the lower installment , which, however, is often associated with a longer repayment period.
What is a refinancing loan?
In the case of refinancing, we deal with a slightly different business. Above all, refinancing is nothing but changing one loan to another, which usually involves transferring credits from one bank to another.
In addition, there are also more restrictions here, because this offer is especially intended for housing loans that are secured by a mortgage.
Although it rarely happens, you can also find offers for refinancing car loans.The most common reason for refinancing is the desire to change the terms of the contract, for more favorable . In other words, a new loan is made, but with a different loan period, interest rate or even in a different currency.
Similarities and differences between refinancing and consolidation loans
A refinancing loan and a consolidation loan are two completely different financial offers , which, however, have certain points in common. Above all, in both cases borrowers want better terms of the contract , which would help them increase the chances of repaying the loan.
In the case of consolidation, the aim is to collect all liabilities into one loan, and when refinancing, change one contract to another.
However, the difference is much more than similarities – the consolidation concerns several financial liabilities of different types combined into one, with refinancing it is a conversion of one loan, usually a residential or mortgage (less car loan) to another loan of the same type, but in another bank.
Motivations can also be different – with consolidation it is simply more convenient to pay off one loan than a few , which is often associated with higher expenses.
In the case of loan refinancing, it is most often decided by people whose financial situation has improved and the conditions for a more favorable and shorter lending period are to change, but with a worse financial situation, the loan period can also be extended.
Which loan will be better – refinancing or consolidation?
Which loan will be better? It depends on what situation we found ourselves . If we have more financial obligations, it will be natural to consolidate them. When it comes to housing loans only, you can think about refinancing, but only if there is a better offer on the market than the one we currently have .
Issues such as interest rates, bank margins and WIBOR affect the amount of installments and it is worth paying attention.However, it must be remembered that regardless of our choice, you must precisely define your expectations , as well as check the offers of banks, because it may turn out that taking a consolidation loan or a refinancing loan will not always be profitable.