Multiple loans can create serious problems for borrowers, especially if the interest payments on the loans go beyond the borrower's ability to pay. In cases like these, the borrower has several options, including debt consolidation. Consolidation is a process by which many different debts are combined into one, usually with a lower overall payment.
Types of Consolidation
Debt consolidation services are offered by several types of organizations. In the case of federal education loans, there are two kinds of consolidation. The first is federal consolidation, which is conducted through a specific program such as the Federal Family Education Loan Program and mediated by large lenders. Direct loan consolidation, on the other hand, does not use an intermediary. Instead, the government directly consolidates the loans. Other debt consolidation options are offered by independent companies to borrowers with more traditional debt (credit cards, car loans, etc.). Some consolidation opportunities are created and marketed by the banks themselves.
Consolidation and Credit Reports
Credit reports go far beyond a simple credit score. Depending on how the debt consolidation is handled, it might not affect the borrower's credit score, but the credit report that a potential lender orders will include a credit history that shows the presence of the consolidation. This could affect the lender's decision about granting a loan.
Closing Accounts
Sometimes accounts are closed in the process of consolidating debt. Closing an account because of a debt problem, even during consolidation, has a very negative affect on credit. Credit reports are concerned primarily with the fact that the account was closed because the loan payments could not be made, regardless of the consolidation.
Rate Juggling
Even if the underlying debt has variable interest rates, it probably will be consolidated so that payments are based on a fixed interest rate. Therefore it is possible that, if rates go down significantly, the fixed interest rate could end up being higher than the variable rates it replaces.
Lender Complications
Debt consolidation can be a complicated process, and in some cases lenders refuse to go through with the consolidation. For instance, some lenders refuse to consolidate the loans of a student serving in the armed forces (since they are guaranteed a flow of income). This can halt the consolidation process in its tracks and create financial complications, because the the consolidation request will be denied but still might show up on credit reports and negatively influence lenders.
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