Understanding The Difference Between Loan Consolidation And Refinancing.
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
