Is A Consolidation Loan a Good Option for Me?

In finances, consolidation occurs when someone pays off several smaller loans with one larger loan. Basically, you are consolidating all of your payments into one larger payment. Often the larger loan has a lower interest rate than the smaller loans. Additionally, the term on the loan is often longer which will lower the amount the consumer needs to pay each month. 

Many companies will reach out and offer consolidation opportunities as an easy fix for your debt problem. Although a consolidation loan may make it easier to manage your debt because you just have one payment to worry about, it does not really address the issues that got you into debt in the first place. However, debt consolidation may be able to help you begin to take control of your debt and make changes in your financial picture. There are several types of consolidation loans available. It is important to choose the right consolidation loan for your situation. 

Student Loan Consolidation

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One type of consolidation loan is a student consolidation loan. In order to qualify for a student consolidation loan, you must have graduated from college. You will take all of your loans, from each year and lender and gather them into one loan. The consolidation loan will lock in the interest rate so that it does not continue to rise over time. Additionally, the consolidation loan usually takes the length of the loan and makes it longer. This makes the payments smaller, but it will not save you interest. This is the best type of consolidation loan to consider because you will not continue to take out student loans. Generally, you can only consolidate your federal loans. this will make managing your loans much easier because you will have fewer payments to worry about. 

If you are interested in a student consolidation loan, contact your current loan provider or the Federal Direct loan program. They can help you consolidate the loans and lock in a set rate. If you are interested in payment forgiveness programs, the consolidation needs to be done through the Federal Direct program to continue to qualify for the repayment benefits.

Unsecured Consolidation Loan

Another type of consolidation loan is an unsecured loan offered by a bank or credit union. These may also be called signature loans. Usually, the interest rate on this loan is lower than credit card interest rates but higher than a mortgage. In this case, you take out the loan for a set period of time, and you can pay off your credit cards with it. This may offer a lower interest rate, but the interest rate is still not that great.

Additionally, you do not address the real problem behind your spending problems and what caused you to accumulate debt in the first place. Many people find themselves back in credit card debt after taking out a consolidation loan, plus they still owe money on the consolidation loan. If you choose this option, you should stop using your credit cards completely.

If you are interested in this type of consolidation loan, you may receive offers in the mail. However, it is worth shopping around to see if you can qualify for a better loan. Apply at your local bank or credit union in addition to the offers you receive. Be sure to take the time to check online for complaints and reviews of the loan and the company offering the loan. 

Consolidation Using a Home Equity Loan or a Second Mortgage

The third type of consolidation loan is a home equity loan or a second mortgage. People will borrow against their home, and use that money to pay off the credit cards and other debts that they have accumulated. This offers the lowest interest rate available on the money, but it also puts your home at risk if you were unable to make payments. Additionally, people often continue to run up debt and end up owing even more in just a few year's time. You should be very careful about choosing this option. It has the most risk since you are trying additional debt to your home. 

If you are considering this type of loan, you should stop using your credit cards completely for a few months before you get it. Take the time to research different companies and banks before you apply for the home equity loan. Going through your local bank or credit union may result in lower interest rates and they may be more willing to work with you if you have a poor credit history. 

Will a Consolidation Loan Help Me Get Out of Debt?

On the surface, a consolidation loan looks like a good product, but it is important to consider several factors before getting a consolidation loan. Most people pay off their credit cards and then continue with their old money habits. In a few years, they have maxed out their credit cards again, and still, have the consolidation loan to pay off as well. It is a vicious cycle that continues to worsen as you keep on consolidating debt. The best solution is to address your spending problems by following a budget and to ​set up a debt payment plan. This will give you the best results in turning your finances around. If you do decide to consolidate, be sure to shop around and look for ways to save interest on your loan. The lower your interest rate, the more quickly you will be able to pay off the loan.