What is a loan consolidation?

Answer 1

Student loan consolidation is where all federal loan disbursements have been combined into one loan. The interest rate is fixed and the time to pay it back has been extended. This will create a lower payment.

Answer 2

A consolidation loan is a kind of loan agreement used in the United States and other countries. It gets its name from the fact that a consolidation loan is a new loan taken out with a lender that consolidates multiple smaller loans into one single payment. This payment is usually made by the debtor on a monthly basis.

This consolidation is the main benefit of this kind of loan. Many people find having to pay several different bills on time quite stressful. The consolidation loan appears on the surface to help people in this kind of situation. Obviously, if all other factors are the same, having to pay one bill on time seems to be a much easier proposition than having to pay seven bills to seven different lenders on time. This is the main reason why people choose to consolidate multiple debts into one monthly payment. It makes managing the debt much easier for the debtor.

However, often times, consolidation loans can only appear to be a better deal on the surface. For example, certain loans may have had very low interest rates as an introductory selling point. When you consolidate all these debts into one payment, the interest rate over all may actually increase. If the interest rates on your debts increase, you will be paying a lot more money. Even if receiving one payment instead of several is less stressful, entering into a new loan agreement where you are actually financially worse off is never a good idea.

A second danger presents itself in the form of expensive fees you can be charged with for setting up the new consolidated loan. For example, you could be charged an activation fee for setting up the loan with a new lender. This fee will be for a certain dollar amount. Alternatively, you could be charged an origination fee. The origination fee can be up to two percent of the entire loan. This means you could be charged an extra two thousand dollars if your consolidated loan totals to one hundred thousand dollars.

Still, a consolidated loan may be a better deal than multiple loans with different lenders in certain circumstances. This is why you should be very careful while calculating whether or not a consolidated loan will save you money.