Should You Consolidate Your Loans?

The question is not as easy to answer as you might think. Sometimes, having too many credit cards and loans is an indication of living beyond your means. Or, maybe you watch every penny but an event beyond your control, such as a major medical event, has brought you to this point.

First, be honest with yourself.  Are you overspending?  Sit down and examine your spending habits.   Complete the budget spreadsheet or use an online budgeting tool.  One we like is www.mint.com¥.  Make tough decisions about what is needed to have versus what is nice to have and reduce or eliminate the latter.   Reduce your spending.  Recognize that this may be a habitual problem that is going to take time to resolve and self-discipline. 

If your spending habits are generally good but you find yourself in a hole due to a catastrophic event, reduce or eliminate where you can.  Consider additional sources of income and ask yourself if a part-time or second job is the temporary answer for you.

After you’ve done all you can, and be brutally honest about this, you may want to consider consolidating your debt through a personal loan, a home-equity secured loan or perhaps even refinancing your first mortgage loan.  You may also be able to roll your credit-card balances to a low-rate card – but because of the 2008 recession, this isn’t as easy as it used to be.  In any scenario, the key is to reduce your interest rates and your monthly out-of-pocket costs.  

If you are paying off several high-interest-rate credit cards, then consolidating your debt could save you a lot of cash. Our consolidation calculator will help you figure out just how much.  Enter the current balance on your loans along with the interest charged, and you'll see how consolidation will affect your overall interest rate. Watch out - if you also take this opportunity to reduce your principal payments, your new low-interest rate loan could end up costing you more than the old one.

Remember that getting approved for new debt is not a slam-dunk.  Make sure that you know your credit score and what it means. 

Final thoughts.  Experience shows that someone who overspends is generally better off by focusing on reducing their spending instead of consolidating their debt.  That’s because the new savings (from lower payments) and higher available credit are usually used to rack up more debt.  So be smart and be honest.