- Loan consolidation simplifies your payments and saves you money.
- Approach student loan consolidation with care.
- Choose between personal loans, mortgage loans, or debt relief consolidation tactics.
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Is Loan Consolidation a Good Idea?
Are you juggling a lot of debt and bills? Do you have multiple credit cards, student loans, or medical bills? Is your credit score good to excellent? If you answered yes to those questions, then loan consolidation can help you save money.
Loan consolidation is a way to simplify your finances by combining multiple debts into one affordable monthly payment. The key to success is to find a loan consolidation program that lowers your interest rates, creates a monthly payment that you can afford, and saves you money.
If you are in financial hardship, look for a debt consolidation program that helps you consolidate your monthly payments.
Here are the three major types of loan consolidation programs: Student loan consolidation, debt consolidation loans, and mortgage loan consolidation programs.
Can you consolidate your student loans?
Yes, student loan consolidation is possible, but you need to proceed with caution.
The simple fact is that there are a lot of student loans. They are at record levels, and balances were more than $1.5 trillion. However, the vast majority of student loans are federal student loans, and they have many rules and regulations.
The good news is that the federal government has many different plans to help you manage your student loans, including loan consolidation, forbearance, and forgiveness. The government student loan consolidation program is only for federal student loans.
The major benefits of student loan consolidation are one monthly payment and a more affordable monthly payment. In some cases, you might be eligible for an income-driven repayment plan. However, it is essential to compare the various options. The government site points out that "Consolidation may cause you to lose certain borrower benefits—such as interest rate discounts, principal rebates, or some loan cancellation benefits—that are associated with your current loans."
You can also consolidate both federal and private student loans through a private lender, otherwise referred to as student loan refinancing. If you have excellent credit, then you may benefit from much lower interest rates. You can also choose a shorter repayment period and pay off your student debt quicker. Before you consolidate your student loans, make sure that you understand how this will affect your eligibility for income and loan forgiveness payments.
Does loan consolidation work with credit card debt?
One of the most popular types of loan consolidation programs is a personal debt consolidation loan. You can combine different types of debts, including credit cards, retail cards, installment loans, and medical bills. Your new loan creates one monthly payment.
A debt consolidation loan's main benefits are a simplified payment schedule, lower interest, faster payoff time, and financial savings. Keep in mind that you need an excellent credit score to obtain the best rates. Also, since most debt consolidation loans are between 3-5 years, your monthly payment might increase.
A debt consolidation loan won't work if you don't qualify for low-interest rates. Also, a loan consolidation doesn't immediately reduce your debt. If you are not careful, you leave the risk to run up new credit card debt.
Should you use your home equity for loan consolidation?
Suppose you need payment relief and have sufficient equity in your home. In that case, you can consider a mortgage loan consolidation option. There are three options, a home equity loan, a home equity line of credit, and a cash-out refinance.
The most significant advantage of a mortgage loan is the loan interest rates and the low monthly payment due to the extended repayment term. In the short-term, your interest payments will decrease. However, If you don't prepay, then your total interest costs will increase.
Here are the three most important things to consider when consolidating your debt with a mortgage:
Do you have enough equity in your home? You will need to have sufficient equity in your home. Most mortgage lenders require that you have at least 20% equity in your home after factoring your current mortgage and your new home equity loan. Your home's value is based on current market prices, and lenders require an updated appraisal report.
Can you qualify for a debt consolidation mortgage loan? To be eligible for a home equity loan, you will need a FICO credit score of at least 620. In most cases, lenders require a higher credit score closer to 660-680. Mortgage lenders also look at your credit history and debt to income ratio. If you have delinquent payments or accounts in collections, then your chances of qualifying are diminished.
Do you want to transfer your unsecured debt to your home? One downside of a loan consolidation using your home is that you take unsecured debt and move it to your home. In the case of default, you risk losing your home.
What if I don't qualify for loan consolidation?
Loan consolidation is not always your best debt consolidation option. Maybe you don't have good credit, home equity, or you can't qualify for a loan. One option is to improve your credit and then re-apply for the loan.
The other option is to look for other debt consolidation options. Two popular debt relief options are credit counseling (and a debt management plan) and debt settlement. In both cases, you consolidate your monthly payments and benefit from either an interest rate reduction or a principal reduction program.
Dealing with debt
Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q4 2023 was $17.503 trillion. Auto loan debt was $1.607 trillion and credit card was $1.129 trillion.
A significant percentage of people in the US are struggling with monthly payments and about 26% of households in the United States have debt in collections. According to data gathered by Urban.org from a sample of credit reports, the median debt in collections is $1,739. Credit card debt is prevalent and 3% have delinquent or derogatory card debt. The median debt in collections is $422.
Collection and delinquency rates vary by state. For example, in Massachusetts, 18% have student loan debt. Of those holding student loan debt, 5% are in default. Auto/retail loan delinquency rate is 2%.
Avoiding collections isn’t always possible. A sudden loss of employment, death in the family, or sickness can lead to financial hardship. Fortunately, there are many ways to deal with debt including an aggressive payment plan, debt consolidation loan, or a negotiated settlement.
