Should I Consolidate My Loans?

You may have seen ads or talked to friends about loan consolidation– combining multiple loans into a single loan, such as a home equity or personal loan from a financial institution. Loans that can be consolidated include student loans, car loans, appliance loans, and other types of consumer loans.

This can be a good idea if the new loan truly lowers your monthly rate, doesn’t increase interest rates, and doesn’t increase the length of the loan.

If you are considering consolidating loans, first, know your monthly payment, loan costs, and loan fees.

Be sure that the consolidation loan:

• has a lower interest rate than what you were paying.
• has the same or shorter payoff period than what you had. For example, don’t consolidate a short-term loan — such as a four-year car loan or a two-year appliance loan — into a 10- or 15-year consolidation loan.
• doesn't cost you more in the long run. For example, be wary of lengthening your payback period to give you a lower monthly payment at the expense of paying more in interest.

You probably will have to pay an initial charge for consolidating your loans, but the consolidation can save you money in the long run through reduced finance charges. Also, it's easier to focus on one loan rather than several. However, unless done properly, sometimes a loan consolidation can actually make matters worse.

One risk associated with loan consolidation is that the lower monthly payment will tempt you to make more purchases because you have “more money” left over. After you have consolidated two or more debts into a new loan with a lower monthly payment, you might feel like you can spend the “extra” monthly savings on things for yourself and your family. Resist this temptation. Instead, enjoy the feeling of living within your means — perhaps for the first time in a long time.

Use the extra money you save to create or add to an emergency fund or increase the payment amounts on credit card debt.