Debt consolidation loan

When you take out a debt consolidation loan, rather than shelling out various amounts to various lending institutions, you can consolidate all your loans into one, use this amount to pay off your original loans, and focus on paying off ONE loan instead of many. This is a very popular choice for students who have taken out money from multiple sources to finance their education.

Debt consolidation loans pay off for some borrowers, but not others. Here are some questions you should ask yourself to figure out if a debt consolidation loan is right for you:

What are the interest rates on your loans?

One of the most wearisome aspects of having outstanding loans is the interest that accumulates on top of your loan. Check out the interest rates of debt consolidation loans. If a debt consolidation loan will get you a lower interest rate than your existing loans, then a debt consolidation loan might be a good option for you.

Are your monthly payments manageable?

If you find it a challenge to honor your monthly payments, have expended your deferment and forbearance options, and/or want to dodge loan default, consolidation can really help you out.

How much are you ready to pay over the long run?

As with all loans, stretching out the years of repayment on consolidated loans raises the total amount you must pay back.

How many payments do you have left on your loans?

Debt consolidation loans demand effort and paperwork, so if you are just about to pay off your loans, a debt consolidation loan may be more hassle than it’s worth.

What consolidation loan benefits do your current lenders offer?

Speak to the loan holders currently managing your loans to find out if they can present terms and repayment plans that suit your needs better than a debt consolidation loan can.

Benefits of Debt Consolidation Loans

The main advantages of debt consolidation loans include:

  • Replacing payments towards multiple loans with a single payment towards the consolidation loan.
  • The possibility of selecting repayment plans, such as extended repayment, graduated repayment, and income contingent repayment.
  • The ability to lock in the interest rate, including the potential to lock in the lower in-school interest rate during the grace period.

The main cons of debt consolidation loan include:

  • Getting a debt consolidation loan during the grace period requires that you begin repayment right away, thus forfeiting whatever is left of the grace period. This might include interest benefits on subsidized loans.
  • Perkins loan borrowers might lose some of this loan’s favorable loan forgiveness provisions when it becomes part of a debt consolidation loan.
  • Stretching out the repayment term may raise the total interest paid over the duration of the consolidated loan.
  • As the law stands right now, a borrower can sign up for a debt consolidation loan only once. This means that if, in a couple of years, interest rates go down, a borrower who has already had a debt consolidation loan will not be able to benefit from the lower interest rates.
  • The perks offered for electronic funds transfer and on time payments tend to be less for debt consolidation loan holders.

Alternatives to Debt Consolidation Loans

Even though a debt consolidation loan makes the repayment process much simpler, it does involve a major disadvantage: a bit of an increase in the interest rate. Students who are having a tough time making monthly payments should think about some of the alternate repayment terms provided for federal loans. For example:

  • Income contingent payments can be adjusted for a lower monthly income
  • Graduated repayment allows for lower payments during the first two years after graduation
  • Extended repayment allows for extension of the term of the loan without consolidation

Remember that each of these options raises the total amount of interest paid. However, debt consolidation loans round up the interest rate to the next 1/8th of a point. Thus, the increase is lower in the 3 options above than in a debt consolidation loan.