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Should You Consolidate Your Loans? January 24, 2023

When you have more than one source of credit and a loan or two in your name, it’s easy to feel as if your payments are getting out of control. Debt consolidation can offer a handle on finances and relief from stress. While that’s often the case, there is more to learn and understand about this type of loan.

Before you decide to take on a consolidation loan, check the details of your current credit report. In fact, if you haven’t taken a look in the last 12 months, you should check this out regardless of whether or not you’re considering debt consolidation. A credit report will list all your outstanding debts and help you understand what type of offers are available to you. The higher your credit score, the better the financing deals you’ll find.

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Consolidation in a Nutshell

Here’s the basic idea behind consolidation: instead of juggling various payments at a variety of rates between a long list of different creditors, you make one payment to one creditor at a rate that’s (hopefully) more affordable than the others. To achieve this, you take out a new loan and use the funds to pay off all (or most of) your outstanding debt.

When to Consolidate

When you’re comparing a consolidation loan to your current situation, the variables to weigh include the size of your monthly payment, the interest rate, the loan term and the conditions of the loan. Generally, the most important factor to consider is whether you’ll save money or pay more by consolidating. Calculate what you’ll spend to pay off your debts as they stand.

To calculate, multiply the number of payments remaining on each debt by the size of the payment. Total your results for an idea of their overall cost. You can use this figure to compare with a consolidation loan. You can also use an online calculator designed for this loan.

See if your lender you’re considering charges an origination fee. Origination fees are rolled into your APR and can cost you an extra 1 percent to 6 percent. If your credit score isn’t great, adding a cosigner to your loan can dramatically lower your interest rate.

A good case for consolidation is if the total amount required to pay off the consolidation loan is significantly lower than the amount necessary to pay off your debts. Such a situation isn’t uncommon. 

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Look at the Big Picture

However, consolidation might make sense for you even if it is more expensive in the long run. If your current monthly payments are simply too high for you to manage, and you know you can make the commitment to a longer term of lower payments, a consolidation loan may be the right move.

Whatever you decide to do, don’t make the mistake of thinking your debt is gone. Consolidation is a helpful step, but it will only work in addition to avoiding spendthrift behavior.

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Category: Credit Cards & Loans

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