When you have multiple loans, you can simplify your finances by consolidating them into just one loan. After you get a consolidation loan, you only have to make one payment each month. In addition, you might get a lower interest rate, a lower monthly payment than you had before and tax benefits, depending on the method you use to consolidate.
Home Equity Loan
If you own a home, one of the least expensive ways to consolidate debt is to take out a home equity loan. Because the home equity loan is secured by your property, you get a lower interest rate than with most types of unsecured loans. In addition, you can deduct interest paid on up to $100,000 of home equity debt if you itemize your deductions. Meet with a mortgage lender to determine whether you qualify for a home equity loan, how much it would cost you to open the loan and what your ongoing payments would be. Be aware that if you fail to make payments on a home equity loan, the lender could initiate foreclosure.
Student Loan
Consolidate multiple student loans into just one loan through one of several methods. Consolidate federal student loans with a direct federal consolidation loan through the Department of Education. This loan averages your weighted interest rates so your overall rate will not change, but you can choose an extended repayment period and simplify your finances with just one payment per month. With private student loans, you need to apply for a consolidation loan with a private lender. The lender bases your new interest rate on your creditworthiness and the market conditions at the time. Another option, if you own a home, is to consolidate student loans into a home equity loan or line of credit. Although this might help you get a lower interest rate, it does not have as much flexibility as student loans because you cannot defer payments if you return to school.
Other Consolidation Options
If you have a steady job with a 401(k) plan, you can borrow from your account and pay yourself back over time. However, if you lose your job, you have to pay yourself back immediately or face penalties. Another option is to get an unsecured personal loan from a bank or credit union. The interest rate on this type of loan is higher than most secured loans, but it might be lower than that of your credit cards. If you are consolidating credit card debt only, one method is to open a new credit card with a low introductory interest rate on balance transfers and move all of your balances. Before doing this, consider the balance transfer fees and what the interest rate will be after the promotional period ends.
Considerations
When you consolidate your loans, you are committing to a specific monthly payment for a fixed amount of time. Before consolidating, assess your finances and determine what monthly payment would be affordable for you. Lengthening your repayment period leads to a smaller monthly payment, whereas using a shorter repayment period helps you get out of debt more quickly and pay less interest. Ideally, your total monthly debt payments, including housing, should be less than 36 percent of your gross monthly income.
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