Understanding Loan Consolidation

The upsides, the downsides and the caveats

Plain and simple, DebtConsolidate_Featureddebt consolidation doesn’t always save you money. Student loans are most often consolidated, but it’s also common for people to take out a consolidation loan to roll any number of debts into one. While either of these could be a great idea, there are also many instances in which loan consolidation does not make sense. It’s best to know all the facts before taking action.

Student loans
“Consolidation is like refinancing — you get a new loan, the new loan pays off your old loans and you pay the new consolidation loan instead,” summarized Heather Jarvis, student-aid expert at U.S. News & World Report.

This is generally a great option for young people just getting out of school, as you can consolidate most federal student loans, including those in default. Consolidation takes all your debts and rolls them into one, making for a much simpler monthly payment schedule. Remembering to pay all your bills, let alone multiple education loans, can be a tough task for a 21-year-old just starting out in the real world.

Other times when student loan consolidation makes sense, Jarvis said, is when you need to escape default (as it stops the collections process), you want to change your variable interest rate loan to one with a fixed rate (for easier financial planning) or you have federal loans from a private lender that you’d like to make eligible for Public Service Loan Forgiveness (since only direct loans are eligible).

Student loan consolidation does have its potential downsides, so beware. First of all, Direct Consolidation Loans can’t be reconsolidated. You get only one chance at making consolidation work for you, so make sure not to waste it. Also, private loans (nonfederal) are not eligible. And that’s not all the possible disadvantages.

“You’ll have the option of taking longer to repay, so a consolidation loan could cost you more over time (since interest keeps adding up until you’re done). If you consolidate while you are in school — currently allowed under limited circumstances — you’ll lose your grace period. In addition, if you’re close to paying off your loans, consolidation might not be worth the effort,” Jarvis explained.

General debt consolidation
Debt consolidation loans can combine various types of personal debt, but the most common is credit card debt. It’s a viable option for people who have several credit cards and struggle to make the minimum monthly payment to each creditor. Also, it helps reduce the number of collections calls and letters you may be getting from creditors or collectors, thus improving your credit score and overall financial health over time. Furthermore, you can more easily manage your finances with a single monthly payment to one source.

Types of consolidation loans
There are two basic types of consolidation loans — secured and unsecured — each with its own set of pros and cons. The major difference is that secured loans are tied to an asset used as collateral (house, car, etc.) in the event of a default; while unsecured loans are based on your credit history instead of being attached to an asset.

According to Joel Greenberg, president of Navicore Solutions, a nonprofit financial counseling organization, you should do your homework before jumping into a loan like this, as it won’t always save you money.

“Compare your existing minimum payments to what your payments will be for that same debt under the DMP [debt management plan], including fees and voluntary contributions. If the latter doesn’t save you 5 to 10 percent, it’s the wrong choice,” Greenberg advised to Bankrate.com.

For more information on student loan consolidation, visit the Federal Student Aid website at https://www.studentaid.ed.gov/sa/repay-loans/consolidation. You can also go to the America’s Debt Help Organization page at http://www.debt.org/consolidation/loans/ for further details on general debt consolidation loans.

Better yet, talk with the experts at your financial institution for facts pertaining to your specific situation so we can help devise a plan that works for you. www.aofcu.com/csa

Used with Permission. Published by IMN Bank Adviser Includes copyrighted material of IMakeNews, Inc. and its suppliers.

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