How to Consolidate Loans

Do you find yourself with more debt than you can handle from a number of different sources? Are your interest rates astronomical? Do you have multiple high payments to make each month? You may want to find out how to consolidate loans to decrease your interest rate or lower your monthly payments.

What is Loan Consolidation?

A consolidation loan is a new loan that pays off several existing loans. When you consolidate loans, you’re simply making a single payment to a new lender and you no longer have debt owed to your original creditor.

It’s a common practice for college students to consolidate their loans, as they may wind up with many student loans during the course of their college career. Loan consolidation gives them one single payment to make each month.

When you consolidate loans, for whatever reason, your original creditors are paid off and your payments to the new creditor may be lower than before. This can be accomplished either by a lower interest rates or increasing the length of the new loan.

Steps You Should Take

1.      Before you decide to consolidate your loans, it’s a good idea to get a copy of your credit report and learn what your FICO score is. A new lender will use this information to base your interest rates, so you want to be sure it’s accurate and up-to-date. You may be pleasantly surprised to learn that despite your debt, your credit score isn’t as bad as you may have imagined.

It’s also wise to consider whether or not there are alternative measures you can take before you do a loan consolidation. If you need to save some money each month, but you’re not buried under debt, you may be able to pay off your loans quickly by prioritizing them, paying off those with the highest interest rate first.

You may also be able to talk to your credit card company and get them to lower your interest rate if you have a good credit history with them and your FICO score is reasonably high.

2.      If you decide to go ahead and consolidate your loans, be sure you’re getting what you think you’re getting. Some companies may use the word ‘consolidation’ in their ads or even their name, but later you could learn that the methods they propose include debt settlement or even declaring bankruptcy. These are very different from simple consolidation loans and have a much more adverse effect on your credit.

3.      Even if your payments are lower, pay as much as you can each month. When you consolidate loans, it’s often for a much longer payback period. Even with reduced payments, if you take the entire time allowed for payback, you could wind up actually paying more in the long run than if you had kept the original loans.

4.      Shop around with several lenders before deciding. Compare the interest rates they’re offering and the terms they’re asking you to agree to. Get the quotes in writing so you can compare them easily.

5.      Don’t take the option for credit insurance. It’s relatively useless and can add unnecessary cost to the life of the loan.

6.      Read every word of the loan contract before you sign it. If there’s anything you don’t understand or is not spelled out clearly in the contract, ask questions until you get them answered. If they balk at answering your questions, or try to dismiss them, take your business elsewhere.

Once you’ve secured a loan consolidation, don’t look at it as freeing up extra money to spend. Setting up a budget and controlling your spending to stay within the budget are necessary to keep you from finding yourself right back in deep debt.