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Consolidation

Debt consolidation is when you take out a new loan to pay off two or more other loans. It’s important to note that while the interest rate on a consolidation loan may be lower, the repayment term is often longer than the terms of the original debts. The longer you take to repay, the more money you pay in interest.

Consolidation works only for people who are committed to paying off what they owe before they take on new debt. Often people who consolidate their debt, return to spending more money than they have. It’s important to be committed to a spending plan based on good financial health.

If you decide consolidation is a good option, talk to your bank or credit union and ask these questions:

• What is the annual percentage rate (APR)?
  The APR tells you how much interest you will pay in a year. Lower APRs are better than higher APRs.
• What kinds of fees will I pay?
  You may pay an application fee, late fees if you miss a payment deadline, and even fees for paying a loan off early (also called a pre-payment penalty).

Note: Debt consolidation loans are different from student loan consolidation. If you include a federal student loan in a private consolidation loan, you lose the benefits of a federal student loan. You can apply for a federal student loan consolidation loan at www.studentloans.gov.