Should I Consider Loan Consolidation?

loan-app.jpg
Nick M. Do/E+/Getty Images

Loan consolidation is when you use one larger loan to pay off several small loans. There are many different types of loan consolidation. It can be dangerous to do loan consolidation because many people will use it to pay off their credit cards and then run up even more debt within a few years. It is important to understand how loan consolidation affects the different types of loans, and will affect your current student situation.

What About Student Loan Consolidation? 

One common type of loan consolidation is student loan consolidation. This is actually beneficial because you lock in a lower interest rate on the student loans. You also have the option of extending the life of the loan and thereby lowering the monthly payments. If you choose to do this it is important to realize that it will increase the amount of interest that you pay because you will be paying on the loan longer. However, that may be worth having more manageable payments, and you can increase your payments as your income increases. If you do decide to consolidate your federal student loans, do it into a Federal Direct loan in order to qualify for the student loan debt forgiveness programs. 

Can I Consolidate Other Types of Loans?

You can consolidate your credit cards, your car loans or signature loans. You will just need to take out a larger loan and use that money to pay off your other debts.

Many banks will specialize in consolidation loans, and you may get loan offers in the mail that offer consolidation loans at low rates. If you receive these, read the fine print and look for reviews online since many of the interest rates are ranges, and you may not benefit from taking out the loan.

What Should I Be Aware of When I Consolidate My Loans?

First it is important that you never consider loan consolidation where you take unsecured debt such as credit cards and signature loans and move it to secured debt. Someone who does this may take out a home equity loan or a second mortgage to pay off the credit cards. This puts the home at risk if they are unable to pay those bills for any reason.

What Are the Benefits of Loan Consolidation? 

Many people consider doing loan consolidation because it allows them to lock in the loans at a lower interest rate and gives them a set payment. It is important to consider how much lower the interest rate is and whether or not it is a permanent rate before you take this step. If it is this may be a good option as long as you stop using your credit cards and change your habits so you do not continue to run up debt. You need to choose a good consolidation loan with solid terms and a set interest rate.

What Are the Risks of Loan Consolidation?

Loan consolidation will often free up a little bit of extra income, and clear up credit card balances. However this does not mean that it is a good idea to continue to spend money at the same rate that you were previous to the consolidation.

People who do this end up running up their credit cards again and then have the consolidation loan to pay off on top of that. It is important to look at your financial behaviors carefully before you take this step.

Will Loan Consolidation Fix My Debt Problems?

Loan consolidation does not address the problems that got you into debt into the first place. It is important to address those problems and stick to a budget in order to change your financial situation. Loan consolidation will not fix your financial problems or get rid of your debt, though it may lower your monthly payments. You need to address the real issues in your spending habits in order to get ahead financially. The first step is to get on a  budget so that you can stop overspending and reach your financial goals.