How (and Why) to Combine Loans Into One Payment
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Combining multiple loans can be a smart way to help you save money and reduce the debt you have to repay each month. It is also a great way to get the best possible deal on your borrowing. Doing this can save money on interest payments and get more favorable terms, including a better repayment period and potentially a lower monthly payment. But before you go down this route, there are a few things you need to keep in mind when combining loans.
In this article
Why should you combine loans?
Having several types of debt may be troublesome to manage, but it can also be more costly than having only one, if you have a number of high-interest debt. Consider this: You may have one credit card with an interest rate of 28%, another with an interest rate at 22%, and another at 24%. If you consolidated the debt into one loan at 18%, you would still owe the same amount of debt but have one monthly payment at a lower interest rate, which could save you hundreds over time.
However, debt consolidation doesn't work for all debt. For example, if you have a student loan at 9% interest, lumping it into the aforementioned new loan at 18% would double the interest you are paying. Debt consolidation is meant to help you save money and make bill-paying more manageable. If it increases your debt, it isn't worth considering.
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Types of debt consolidation
- Debt consolidation loan: This involves taking on new debt to help pay off other debts at a lower interest rate. A debt consolidation loan combines several loans into a single monthly payment; it's like a new loan with one bigger loan amount to pay off all existing debts. Lowering the interest rate on your loans can help you manage your debt more effectively and save money in the long run. Most lenders allow you to apply online or by phone in a matter of minutes and will provide a decision within a day or two. If approved, your funds will typically be disbursed to your account within a few days, and you’ll be able to use them to pay off your existing debts. This loan may also come with alternate repayment plans.
- Balance transfer credit card: This one is exclusive to credit card debt. These cards allow you to transfer a balance from another credit card to a lower interest rate card with more favorable terms. Keep in mind, however, that if you transfer the balance to another card with a 0% introductory annual percentage rate, your interest rate may revert to a higher level after the introductory period expires.
- Home loan transfer: Transferring your mortgage to another lender can lead to lower monthly payments and lower interest rates. This can also make it easier to get approved for additional financing if you need a larger home in the future. Note that you may need to pay closing costs when you transfer a mortgage, so make sure that you factor in those costs when comparing rates between lenders.
- Personal loan: The "personal" is there for a reason! That means you can use the money for pretty much anything legal, including consolidating different types of loans. Several online lenders offer personal loans, and you can apply for a loan and receive a decision within minutes of submitting your application. The application process is fast and convenient, and you’ll be able to get the funds you need as early as the next business day.
- Student loans: Only federal education loans can be consolidated. The interest rate workings are a little complex, however. To see the eligibility criteria, head over to Studentaid.gov. The website provides a complete breakdown of whether you have a qualifying loan and other helpful information.
- Home equity loan: A home equity loan lets you borrow against your home equity. you can either access the funds as a lump or ask the lender to open a line of credit.
How to combine loans
Go for a fixed-interest rate loan
You have to make sure that you’re getting a fixed-rate loan combination so you don’t have to worry about interest rates changing over the loan term. This means you won't have to refinance your loan to get a lower rate later down the road. This is ideal if you want to keep your loan payments consistent throughout the life of the loan. By comparison, if your loan has a variable interest rate, your payment amounts wouldn't be fixed. A fixed-rate loan can also help you avoid penalty fees if rates drop significantly while paying off the loan.
Shop around
You should choose a lender that offers competitive interest rates and flexible terms. This is especially important if you’re combining two different kinds of loans. You don’t want to pay more than you have to just because your lender doesn’t have the best rates available.
There are different options to choose from, so you’ll want to make sure you find the right one for you. For example, traditional banks offer loans, mortgage brokers offer mortgages, and online lenders allow you to complete the entire process from the comfort of your home. Each option has different benefits, so it’s smart to look at each one before deciding which one is right for you. In many cases, an online lender will offer better rates than traditional banks and can save you a lot of money on interest charges in the long run. This is because online banks aren't burdened by the same costs as a traditional banks with brick-and-mortar branches.
Compare a few different lenders and see what kind of deals they offer. Once you have an idea of your options, you can choose the best deal for you.
Read the fine print
Once you have decided to apply for a loan, you’ll need to complete an application and submit it to the lender for approval. The application will ask for personal information such as your name and address and details about your current income level and credit report. In some cases, the lender will require additional documentation to support your application for a loan and may ask you to provide additional information regarding your financial history or credit score.
You’ll also want to carefully consider each loan's terms and ensure they align with your current financial situation. What are the repayment terms? Are there any origination fees? What do minimum payments look like? There are all questions you should ask yourself as you do a deep dive into the terms. It’s important to take the time to carefully fill out all the paperwork and ensure everything is accurate before making any commitments. If you make any mistakes on the application, it could delay the approval process or even cause you to be denied the loan altogether.
Once you’ve completed the application and submitted it, the lender will typically review your information and determine if you’re eligible for a loan. If the lender approves your application, you’ll usually receive an offer with the loan terms to review them and decide if you want to move forward.
Take advantage of the grace period
Most lenders offer an interest-free period that allows you to pay off the balance on your loan without incurring any additional charges. Your interest-free period typically starts once you’ve been approved for the loan and the funds have been disbursed into your account. This period can be used to pay down the principal balance of your loan or take advantage of a special promotion the lender is offering. Once again, read the terms and conditions before you sign the dotted line so you understand your obligations. Borrowers should keep in mind that they may be charged late fees if they don’t meet the payment requirements outlined in their loan agreement. If you'd like additional color on something in the agreement, you shouldn't hesitate to contact the lender.
Don't over-extend yourself
Some lenders will allow you to take out a larger loan than you can afford – which is never a good idea. Make sure you’re taking out a loan that comfortably fits your budget. This can help you avoid making high monthly payments that you may not be able to afford. Taking out a high-interest debt will make it much harder to pay off and cost you much more in the long run. When you choose a loan based on your current finances, you’ll be in a better position to meet your financial goals and make smarter financial decisions in the future.
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FAQs
Will my credit score be affected if I combine loans?
If you open a new line of credit, be it a loan, credit card or home equity, the lender will conduct a hard credit check, which will appear on your credit report. If you do not get accepted into one new line of credit and make multiple attempts, creditors will see multiple inquiries and assume you are having difficulties, so be sure to apply to one that often approves for those with your current credit score.
What happens to my credit score when I close other debts?
Paying off loans or closing credit cards using a debt consolidation loan has its pros and cons. Many will find their credit score drops after consolidation due to the hard inquiry and then closing of debts but quickly rebounds after making on-time payments to the new loan.
What should I do if I do not qualify for a debt consolidation loan?
If debt is seemingly getting out of your control, it may be wise to speak to a debt counselor and set up a debt management plan to regain control.
The bottom line
Consolidating your debts into a single payment may be a good option for eliminating multiple monthly payments and the associated costs of paying your bills on time. However, if you have high-interest rates, you may find that consolidating your balances is only a temporary fix for your debt problem. Over time, you will eventually face the same problems with managing your debt that you did before you consolidated it. This is why you should take stock of your finances to see if you can easily manage the installments without breaking the bank.
Once you know where you stand financially, you can begin to look for loans. Each lender is different, so you’ll want to compare offers from several lenders before deciding which one you want to work with. The lender will review the information you provide and determine whether or not you're eligible for a loan. Applying for these loans is fast and convenient, and most lenders allow you to complete the process from the comfort of your home without spending time in a branch.
But if debt consolidation isn't your thing, you can explore other financial products providing debt relief on your unsecured debt. Some debt consolidation options have a low APR to encourage people to sign up, but these introductory rates last a few months. Other debt relief options include a debt management plan and debt settlement.
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Writer
Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.
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