Is a Consolidation Loan a Good Option for Me?

However, you may only accomplish that by using a direct consolidation loan provided by the Department of Education if you want to keep the advantages of federal student loans, such as flexible repayment options and eligibility for loan forgiveness. Contrary to other consolidation loan kinds, this won’t affect your interest rate (your new rate will be a weighted average of your old ones).

Private student loans can be combined with those from other private lenders without fear of losing significant borrower safeguards because they do not come with any unique borrower perks. Even if it might result in the consolidation of several student loans into one, in this scenario the procedure would be known as student loan refinancing.

Alternatives to Debt Consolidation Loans

You have other options besides debt consolidation if you want to modify the conditions of your debts.

Renegotiate the Terms of Your Existing Loan

If you ask, some lenders might adjust the conditions of your loan, especially if you’re having difficulties making payments. The advantage of this is that renegotiating can be feasible even if you don’t meet the requirements for a debt consolidation loan due to poor credit or past-due accounts.

Refinance

Consolidating and refinancing both involve getting a new loan. However, you can obtain a new loan to settle a single existing obligation rather than consolidating several debts in order to refinance. For instance, a lot of people refinance their mortgages, either to lower their rate and payment or to take out a cash-out refinance loan to access the equity in their property.

Balance Transfers

If you owe money on credit cards, you may be able to transfer the debt from one or more of your current cards to a new balance transfer card with a low introductory interest rate. For a brief period, this might reduce your interest rate to as low as 0% APR. But be cautious because your rate can increase significantly once the promotional period expires, and there is typically a fee of up to 5% of the transferred amount that will be added to the balance.

A Debt Management Plan

Closing your current credit cards and having a credit counselor deal with your creditors on your behalf are both parts of a debt management plan, which you can obtain from a nonprofit credit counseling agency. They then come up with a repayment strategy for all outstanding obligations, which can include a reduced interest rate.

When Does Debt Consolidation Make Sense?

You might benefit from consolidating your debt if:

• You might be eligible for a loan for consolidation: Usually, you’ll also need to provide confirmation of your salary and acceptable credit. You might require a co-signer if your financial situation prevents you from being approved on your own.
• Consolidating your debt will allow you to lower the interest rate on your existing loans: Generally speaking, it makes little sense to take out a consolidation loan with a greater interest rate than your existing debt because you would end up increasing the cost of repayment over time due to the higher interest payments.
• The new monthly payments on your consolidation loan are within your means: If you won’t be able to make the monthly installments, you shouldn’t borrow money.
• You have a sound financial strategy in place: If you don’t, consolidating your debts could be problematic because you might think you’ve made progress on debt repayment when all you’ve done is shift your loan balance. It’s also risky if you don’t manage your spending and use the credit that your debt consolidation loan has opened up to increase your debt.
• You are aware of the overall cost of repaying your consolidation loan: Don’t just concentrate on reducing your monthly payment; if you extend the repayment period, even with a lower payment, your loan may end up costing more in the long run.