Benefits of Consolidating
Consolidation is not a magical remedy to your debt problem, but for those who are ready to get a handle on their debt and take control, consolidating could become your debt free solution. It's only as good as you are responsible. If a pattern of bad credit and loan decisions put you in the position of considering debt consolidation, be certain you are receiving the counseling or advice you need to end that pattern as you use consolidation to help you pay back the debt you already have. Creating new debt will complicate your debt solution.
New loan term
To consolidate, you typically do not simply move several of your debts into one account. Your debts are gathered into one lump sum and you take out a new loan in order to pay them off. This means the terms of your individual loans end and those of your new, single loan come into effect. Any deferments or forbearances, interest rates, and payment schedules connected to your former loans terminate and those attached to your new loan begin. If you consolidated all your unsecured loans into another unsecured loan, a failure to make payments on your new consolidated loan could still force you into bankruptcy. If you consolidated your unsecured or secured loans into a secured consolidated loan, you will have to put up collateral. Should you fail to pay back your consolidated loan, your collateral will be seized and sold to pay back the debt. Consolidated loans still must be paid, and paid on time, or they compound the debt problem rather than become a debt free solution.
Interest rates
When you consolidate, you receive a new interest rate. Because interest is often the debtor's Achilles heel, a better interest rate could be the debt solution you need. In most cases, the interest rate will be lower than your previous highest interest rate, but higher than your previous lowest interest rate. Consolidated federal education loans earn a weighted median interest rate that is fixed for the lifetime of the term. Not all consolidated loans have fixed interest rates, so be certain you are clear on which type of consolidated loan you are receiving. And while federal student loans, when consolidated, max out at an interest rate of 8.25 percent, private and other types of consolidated loans do not.
Lower monthly payments
Although you are not required to adopt an alternate or extended payment plan, it is an option. Standard loan repayment plans are ten years, but when you consolidate you are able to extend your repayment plan to ten to thirty years. If you are in desperate need of short-term relief and currently struggle to pay back your loans, an extended repayment plan that lowers your monthly payments could offer the solution you need. However, doing so will increase the total amount you owe, as you are paying interest over a longer period of time. It is a decision that should be made with professional help. Extending the life of your loan may not be a helpful debt solution for you if your future is not financially stable.
One lender
One loan means one lender. Whether you opt for an extended repayment plan that comes with a lower monthly payment or stick to the standard ten-year repayment plan, you have just one monthly payment to one lender. This decreases your chance of accidental missed payments, and helps to keep you informed of your debt status, focused on your repayment plan, and on track to completing your debt free solution.
