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How to refinance
If you have multiple debts you want to make more affordable, refinancing can be an option. You might also consider it if you just want to simplify your outgoings.
But what exactly is refinancing and how does it work? We take a closer look.
You may be more familiar with refinancing under its other name – debt consolidation. Essentially, it means to pay off your current debts with a new loan that comes with terms that are more manageable for you.
Refinancing is a term more commonly used in the US, while in the UK we tend to say debt consolidation. But they’re both pretty much the same thing. So, how do they work?
How do you consolidate your debts?
There are a few ways of refinancing, or consolidating, your debts. One way is to take out a loan worth the total of your other unsecured loans and credit cards when you add up the balances. You would then pay these off with your new loan.
The benefit of this is that rather than making several different payments a month, you make just one. But another reason why some borrowers choose this option is that they may be able to get a better interest rate on their new loan than they’re currently paying on their other debts, which could make their monthly payments cheaper.
In most cases, the type of loan used to consolidate debts is a homeowner loan. This is secured to your property, which can mean the interest is more affordable than it would be on other types of borrowing. However, on the flipside, if you miss a payment or stop making them, your lender has the right to repossess your property.
And although the interest rate on a homeowner loan might be lower than on a personal loan, because you are making payments for longer you may end up paying more interest in the long-run than you would have by sticking to your original agreement.
Alternatively, you could take out a personal loan. This is not secured to your home so the interest rate might be higher. You’ll also have a shorter time in which to pay the money back, which means you’re unlikely to be able to borrow as much as you would with a homeowner loan.
Another way of consolidating your debts is to take out either a balance or money transfer card. Neither of these would need to be secured to your home, which can make them a less risky borrowing option.
With a balance transfer card, the clue’s in the name. You transfer the outstanding balances on your current credit and store cards to the new card and then make just one payment a month towards this.
Some balance transfer cards come with an introductory offer of 0% interest. If you successfully manage to clear your entire balance in this time, you won’t have to pay a penny in interest.
A money transfer card, meanwhile, transfers a lump sum of cash into your current account. You can then use this to pay off your credit card, store card and overdraft balances or any personal loans you’ve taken out.
Money transfer cards can also come with a 0% interest period. However, with both balance transfer and money transfer cards, there can be a fee when you make the original transfer.
Which option’s best?
It all depends on what your needs are. If the total value of your outstanding debts is quite large, a homeowner loan will most likely provide you with a bigger lump sum than either a balance or money transfer card. However, there’s unlikely to be an interest-free period, and your home will be at risk if you stop making your payments.
Balance and money transfer cards aren’t the best option if you’re looking to consolidate larger debts. But if you just want to simplify your payments and hopefully reduce your monthly outgoings, they could help you do just that.
If the value of your outstanding debts is very large and you’re struggling to make your repayments – or you’ve already stopped making them – debt consolidation in any form right not be best for you right now. Instead, it’s worth seeking the help of a financial advisor or debt charity and seeing what steps to take next.