How to Consolidate Loans

If you've watched TV or opened your mail lately, you know that there are plenty of companies eager to help you consolidate your loans to cut your payments in half," "lower your interest rates," and "help you get out of debt fast." Indeed consolidating your high interest loans and credit card debt into a single loan with a lower interest rate and more manageable payments makes perfect sense.

Unfortunately, it doesn't always work out that way. Many people who consolidate their loans end up paying far more than they would have otherwise and, in the case of home equity loans, an alarming number of borrowers end up losing their homes. Add to this the fact that many so-called "consolidation" programs aren't really consolidation loans at all, and debt consolidation, rightfully, has a bad reputation. Still, you may be able to benefit from consolidation if you explore your options and proceed with caution.

Steps

1. Get your credit report and FICO score. Any loan you get will be based largely on your credit score, so you should find this out. If you look at your score and realize that you wouldn't lend money to yourself, you've got to be realistic with your expectations - it's going to be hard to get a low interest rate.
   
   However, if your credit score reveals that you actually score quite well and have a reasonable credit rating, you may easily be able to consolidate loans at a lower rate, especially if your credit has improved since you got the loans. Go over your entire credit report carefully to make sure it's accurate. Inaccuracies can hurt your score and keep you from getting the rate your deserve.
   
   
2. Consider all your options. Before you jump into a debt consolidation loan, think about your other options.
   
   
   • If you just want to save money, but you're not in dire straits, simply pay off your debts fast by prioritizing them. Pay as much as you can each month on your highest-rate loan while making minimum payments on your others. This way, you are able to lower your monthly finance charges as quickly as possible.
   • Call your credit card company. If you have relatively good credit, you may be able to simply talk to your credit card company and negotiate a lower interest rate. If they won't give you a lower rate, you may be able to transfer your balance to a credit card with a lower long-term rate or a no-interest introductory rate - just make sure you know what your rate will be after the introductory period.
   • Contact a credit counseling agency. A reputable credit counseling agency can provide you with free or low-cost advice on how to manage your debt, and they can help you prepare a budget to get your finances under control. Credit counseling, however, does not necessarily mean entering into a debt management program, and you should beware any organization that tries to push you into such a program immediately. In general, be careful when choosing a credit counseling agency. Even agencies that are registered non-profits frequently charge high fees.
   • Sell your car. If you can't afford your car payments, try to sell your car to pay off the loan. If the car gets repossessed, it will end up costing you even more money.
   • Talk to your mortgage lender. Reputable mortgage lenders will usually work with you if you have some temporary trouble paying. Call them as soon as you know you'll have trouble, and they may temporarily suspend your payment or accept reduced payments. You might also be able to extend the time for repayment, thereby reducing your monthly payments. Make sure you find out about any additional fees or penalties for any arrangement, and consider refinancing your home if you can get a better interest rate.
   • Borrow from your life insurance. Whole life policies usually allow you to borrow against the cash value of the policy. This easy, usually low- interest, loan can get you quick cash to pay off debts. Be sure to check on the tax implications of borrowing, and understand that if you don't repay the loan it will be subtracted from the amount your beneficiary receives.

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