What Are The Benefits of Loan Consolidation?

If your loan or credit payments are out of control, and you’re feeling a burden of too many loans all at once, then loan consolidation may be for you. Loan consolidation, also known as debt consolidation, is when you take out one loan to pay off your others.

Benefits of Loan Consolidation

1. Less payments – if you are making lots of payments, consolidation will ensure that you’re only making one payment each month. Even if this payment is high, you’ll still avoid the hassle of managing several different loans and coping with marking down each lender’s payment due date.

2. Lower payments – with some loan consolidation, you can get a lower interest rate which means a lower payment compared to what you were paying before. If you take this opportunity and actually pay more than your payment amount (hopefully still less than your old payment), you’ll be paying down your principle and will save you from being charged more interest later on.

3. Fixed interest rate – with student loan consolidation, for example, which is backed by the Department of Education, the loan rates can NOT exceed 8.25 percent.

What Types of Loans Can You Consolidate?

You can consolidate any type of loan – remember that loan consolidation is the act of taking out one loan to pay for others. If your interest rates are through the roof on your credit cards, you could take out a personal loan (if your credit score allows) and pay off your those credit cards with your loan.

For example, at Wells Fargo, we calculated a $10,000, 5-year personal loan at a rate of 10.14% with a monthly payment of $214.49. If you have several credit cards and payments of $50 or more each, with say, a 14% or even 19.99% interest rate (not unheard of with credit cards!)

Many people also consolidate student loans. Despite being very helpful to most, student loan consolidation isn’t for everyone. The Department of Education notes that if you are nearing the end of your loan balance and are almost done paying your loan off, you may be better to keep paying your current loan.

Loan consolidation also typically extends your payments, so while you may be paying less money each month, you could be paying it for a lot longer compared to if you didn’t consolidate. Always do due diligence and use a student loan consolidation calculator or other loan calculators to make sure you’ll actually be saving money — not paying more.

Debt and Loan Consolidation Scams Are Rampant

For every honest lender out there offering assistance with loan consolidation, there will be some bad apples. In 2008 the Better Business Bureau reported on one debt consolidation scam where the company began withdrawing almost $700 per month from a woman’s bank account each month. The money was not going to her creditors or loans, either.

The Better Business Bureau mentions that several red flags that signal trouble with a company are:

• “Quick and easy” Fixes;
• A company pledging to “lower your monthly payments by 30 to 50%”;
• Asks for detailed financial information (especially account numbers) before actually enrolling you and discussing fees or services.
• Pressuring you to make a fast decision on whether to go with the company.

Loan consolidation can be a great way to lessen your fiancial burden, especially in these times, but with everything out there you need to do your due diligence. We recommend using the BBB’s business search to verify a lender before proceeding to give them any information.