Refinancing Vs. Loan Consolidation: Which Should You Go With

While both are financial options that borrowers of local money lenders can explore, refinancing and loan consolidation are different in many ways. Generally, refinancing involves other lenders or financial institutions while a loan consolidation involves only one lender and multiple debts.Here are other key differences:

    1. Purpose

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    The purpose of refinancing is to secure better loan terms like lower interest rates. It is done when you want a lower interest rate or when you think a different duration for the loan will be better. 

    On the other hand, loan consolidation is the combining of multiple debts into a single, manageable payment. It is done to avoid any missed payments and the penalties, charges and consequences that come with it. Keep in mind that consistent failure to pay on time can be a reason to be declared in default. In most loan agreements, the lender can demand that you pay the loan in full if you keep on missing due dates.

    1. Structure

    When you avail of refinancing, you are effectively replacing your existing loan with a new one. Since the goal is to change the terms like interest rates and repayment periods, it usually requires a new agreement. 

    On the other hand, loan consolidation merges debts into a single loan. You will no longer need to keep track of different interest rates and payment schedules.

    1. Number of Loans

    Individuals who opt for refinancing are usually those who only have one loan. They were able to negotiate a lower interest rate or a higher loan amount after they applied for their existing loan. These better terms are often due to an improved credit score or an unexpected increase in income. For example, if you applied for a home loan with a term of 10 years for SGD 1 million and in the 5th year you get promoted to senior manager, you can ask your lender for a new loan and they will evaluate you based on your improved financial credentials.

    Loan consolidation addresses multiple debts. Since the goal is to simplify, it usually does not involve better terms. The benefit lies in making it easier for the borrower to comply with his or her obligations. Another implicit benefit would be the decrease in stress and anxiety. Hopefully, there would be no more nagging feeling that something is amiss or unpaid.

    1. Interest Rates

    Refinancing may result in lower interest rates if market conditions allow. It is largely dependent on the current economic situation.  In this case, it would not be easy to wait for perfect timing for a refinancing. It is best to ask for advice from a financial consultant. 

    Another way would be to shop for better loan terms. Do not get comfortable with your housing loan or other long-term loans. Look for a way to negotiate with your lender. After all, there is steep competition in the lending business. With the way lending apps and other advances in technology are changing the game, lenders need to be on their toes to keep their market share and their clients. Use these factors to your advantage.

    On the other hand, loan consolidation usually offers a fixed interest rate based on the weighted average of the consolidated debts. It does not leave room for a new lender. You cannot present better terms from another lender since your loan is with a specific one.

    1. Long-Term Impact

    Refinancing can affect credit scores and may involve fees, but it offers potential savings over time. Of course, better terms do not come for free. You will have to anticipate more stringent requirements, sometimes, even better or higher score requirements and fees and charges. If you are ready to comply with these requirements, you can opt for refinancing.

    Loan consolidation streamlines payments and helps you manage your obligations more effectively. No need to juggle a lot of different details. It also removes the need to juggle between different financial institutions or anticipate another credit investigation. However, it might extend the overall repayment period and as a result, increase the total interest paid.


    One can still plan a good payment strategy even if they have debts or multiple debts. The key is finding time to learn more about the current situation and what lenders can offer. Lending is a business. Lending companies need to keep up with the demands of the market and the changes brought about by technology.

    Rethink your current plan of action versus goals. Can you manage to look for better loan terms and pay off your current loan? Will having a single loan obligation benefit you? Or maybe you’re in a better financial situation and can now avail of refinancing? The decision is in your hands.

    Vivek is a published author of Meidilight and a cofounder of Zestful Outreach Agency. He is passionate about helping webmaster to rank their keywords through good-quality website backlinks. In his spare time, he loves to swim and cycle. You can find him on Twitter and Linkedin.