Should You Consolidate Your Loans?

What most people do not understand is that consolidating loans is not a "quick fix". It doesn't save you money on the principle of the loan (the original amount you borrowed) and it doesn't excuse you from the debt. When trying to decide whether or not you should consolidate your loans, consider all of the ramifications and determine whether it will help or hurt your financial situation.

Consolidating your loans is simply the act of combining several different debts into one lump sum. For example, if you owe $4,624 in credit card debt, $12,318 on a personal loan, $60,000 on a mortgage and $2,050 on a cash advance, consolidating your loans would mean that you still owe $78,992, but you won't have varying interest rates on each of the loans.

So why would someone want to consolidate their loans if they still owe the same amount? Essentially, people decide to consolidate their loans because they can usually negotiate a lower interest rate. For example, let's say that you owe $5,000 on one credit card and $1,200 on another. The first credit card has a 7.9% A.P.R. while the second carries a 17.9% interest rate. In order to escape the nearly 18% interest, you might instigate a balance transfer and combine all of your debts on the first credit card. Consolidating your loans works the exact same way, and in some cases, it makes good financial sense.

The first step toward deciding whether or not to consolidate your loans is to figure out how quickly you can pay them off. Most experts recommend paying off as much debt as possible within three-to-five years. This allows you to successfully budget your income while working toward a healthy (and relatively immediate) goal. Those who set debt-elimination goals of ten or fifteen years are more likely to fail because the end result is not imminent.

Next, figure out which of your loans you can consolidate. There are plenty of ways to do this:

1. Credit Cards

You can consolidate your credit cards by using balance transfers to low-interest-rate cards, as mentioned above. This is usually the most frugal way to handle it as you won't have to pay to have a third-party company do it for you. This won't work if all of your credit card interest rates are high, but consider this option whenever possible.

2. Loans

There are two major ways that you can consolidate cash loans, such as private or business loans. The first is to hire a company to handle loan consolidating for you. They will negotiate a lower interest rate for you, which allows you to pay off your loans faster. The second way is to pay off your loans with a low-interest-rate credit card. This is only advisable if you have a credit card limit that exceeds the amount of the loan and if you have a credit card with a low interest rate.