Understanding The Difference Between Loan Consolidation And Refinancing.

November 4, 2015


Loan Consolidation and Refinancing are two components of the American student loan industry. People generally get confused between the two and use them interchangeably. In reality both of the terms have completely different implications. Therefore it becomes important to get familiar with the terms before you discuss them with customers.


Loan consolidation is condensing multiple loans into one single loan. Federal loan consolidation is offered by the government and is available for most types of federal loans. In this option the borrower is simply charged the weighted average interest rate of the loans being combined. It may help save money in certain conditions based on the loan amount and financial condition of the borrower. The main benefit is that it eliminates the need to handle so many loans and payments.


One should keep in mind that consolidating loans may result in the loss of borrower benefits offered with the original loan.


On the other hand, refinancing is applying for a loan under new terms and using that loan to pay off one or more existing student loans.  If there is an improvement in the financial situation and credit score of a borrower, then they can use this to lower interest rates, and save money in the process.


One can refinance their federal student loans into a private loan. The same goes for refinancing a private loan into a new private loan as well. However, one cannot refinance federal or private student loans into a federal loan. So federal student loan borrowers should consider the fact that they will lose the other benefits available to them if they go for refinancing.


Comparison between the two:


                                                                        Consolidation                 Refinancing


Credit check required                                      No                                             Yes


Lowers the interest rate                                   No                                             Yes 


Lower Monthly Payment                                  Yes                                            Yes


Will save money                                             May Be                                         Yes


Will have one bill                                               Yes                                            Yes


Will have only one loan                                     Yes                                            Yes


Can reduce the payment term                          No                                             Yes


Provided by government                                   Yes                                             No


Fixed Interest rate                                              Yes                                             No


Source: https://studentaid.ed.gov





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