Loan consolidation means combining several existing loans into a single loan. Consolidating your loans can substantially reduce your monthly payments and lengthen your repayment period, which in turn can translate to far greater interest paid over the loan’s lifetime.
The types of debt can be consolidated include a wide variety of loans such as student aid, auto financing, home mortgages, and credit card balances.
Do I Qualify?
Different consolidation methods have different requirements.
Anyone who has federal student loans or federal parent loans, including Subsidized Stafford Loans, Unsubsidized Stafford Loans, PLUS Loans, Federal Perkins Loans, and Loans for Disadvantaged Students, is eligible for consolidation. You must be in the grace period or already in the repayment process on the loans you wish to consolidate; however, if you’re in default, you can still consolidate provided you make the appropriate arrangements with your lender.
You can also consolidate student loans with your spouse, but keep in mind that this functions like co-signing a loan. You’re both responsible for the other person’s debt, so be sure you’re willing and able to repay the full amount should your spouse default.
Consolidating your credit cards involves transferring high-interest balances to zero-interest or lower-interest cards. Check your credit-card issuer’s website or give them a call to get the process started. When consolidating your credit cards, don’t just look at lowering your interest rate – consider the entire picture, including the fees you’ll have to pay down the line. Also remember that many balance transfers involve “teaser” rates – and with one late payment, your rate may jump drastically.
The government offers student-loan consolidation services. These programs allow you to combine federal education loans into a new loan. This simplifies student debt to one monthly payment and one single lender.
Borrowers have four different options for repayment: Standard Repayment, which means a fixed monthly payment until the loan is satisfied; Graduated Repayment, which starts low and gradually increases over time; Extended Repayment, which requires student-loan debt of more than $30,000 and offers up to 25 years for repayment; and Income Contingent Repayment, which bases monthly payments on the borrower’s income, amount of debt and family size, and also offers up to 25 years for repayment.
You’re well advised to read the fine print before signing any consolidation agreement. Though consolidation can be useful, it can also incur additional fees and interest, meaning that your loan will cost you more in the long run.
A loan consolidation is itself a new loan, which means a fresh obligation. You’re simplifying your debt, not eliminating it. To decide if consolidation makes sense in your particular situation, talk to a finance professional. You can also consult Bankrate’s interactive feature to decide if consolidation is the right move for you.