Loan Consolidation

Loan Consolidation is the act of taking several loans and combining them into one loan. This generally involves taking out a new loan to pay off a number of other loans, thus combining several debts into a single plan.  Most people who consolidate their loans usually do this either to attain a lower interest rate, or to have the simplicity of a single loan.  Usually, the new loan has better conditions and more benefits for the borrower than the old loans did.

Types of Loan Consolidation

There are several ways to go about loan consolidation that are both secured and unsecured.  Most loan consolidation refers to student loans, and involves taking several unsecured student loans and consolidating them into a single unsecured loan.  Loan consolidation does not instantly eradicate debt, and every option carries its own price tag.

Process of achieving the best student loan consolidation 

It is integral to know before starting the process of consolidation that it is not possible to consolidate federal loans and private student loans into one loan as the terms and conditions are markedly different.  Combining federal loans into private loans could negatively affect the benefits of federal loans.

Federal Student Loans Consolidation 

First and foremost, opt for direct student loan consolidation i.e. the consolidation of federal loans like Stafford Loan.  It is free, extends repayment terms, which in turn reduces monthly payments. There are also chances that the consolidated interest rate is lower than that in previous separate loans.

Private Student Loans Consolidation 

Many financial organizations specialize in loan consolidation programs for private student loans. It is important to find programs with zero consolidation fees, no penalties for paying back loan earlier, and variable interest rates; there are great chances that the ideal student loan will consolidate with lower interest rates than multiple smaller loans. A decent job can also help lower interest rates when entering the loan consolidation process with private loans.

Unsecured Loan Consolidation vs. Secured Loan Consolidation

Unsecured debt refers to debt that is not attached to an asset such as a house or a car this includes most student debt. Lenders offering unsecured loan consolidation have to rely on the borrower to repay them.  If the borrower does not repay the loan, the lender can charge fees but has no asset to seize in return. Therefore, interest rates on unsecured loans are generally high.

Other examples of unsecured loan consolidation are personal loans, bank or credit union consolidation loans, and credit card loans.

Secured debt is debt that is connected to, or secured by, an asset. If the borrower does not repay the loan, the lender can take that asset as repayment. Therefore, secured debt usually has lower interest rates.  Examples of secured consolidation loans are home equity loans and car loans.

Personal Loans to Consolidate Debt

Personal loans can be a good option for consolidating debt if the borrower has good credit. When applying for a loan, ensure that the loan’s interest rate is considerably lower than current rates and that the payback period create undue financial pressure.


The ability to secure loan consolidation in regards to non-student loans will depend on four factors:

Income Level: The lender must assess the ability to repay the loan. If the borrower is not working, or if they have low income, they probably won’t qualify for a consolidation loan.

Loan Needed: Obviously it is easier to qualify for a $10,000 loan than for a $100,000 loan. The more money needed, the higher the borrowers income will need to be.

Collateral: Borrowing $200,000 off a house worth $400,000 is possible, and having collateral of this type will enhance the chances of qualifying for a mortgage loan consolidation. If the borrower doesn’t own a home, or if their home has no equity, then it will be nearly impossible to qualify for secured loan consolidation.

The Credit Report: Debt consolidation loans almost always require a good credit score.  People with a good credit rating that are concerned with paying off rising debt should seek out loan consolidation before missing payments and adversely affecting credit scores.

Loan Consolidation onto a Credit Card

One option for loan consolidation is to take advantage of credit card balance transfer offers. Credit card companies try to attract new customers by offering zero percent or low percent interest on balance transfers. Transferring balances from credit cards with high interest rates onto a card with one of these offers is a good short term way of consolidating debt, but consumers should also be aware that frequent balance transfers and revolving credit can reflect poorly on a credit report.