Wednesday, August 22, 2012

The pros & cons of loan consolidation

I don't know about the rest of you, but my wife and I have been deluged, of late, with offers to consolidate our mortgage and other loans.  This typically has me thinking two things:

1)  Wow.  What a waste of paper.  E-mail it to me and save yourself some money!
2)  How much money can I really save with this?

So, what are the pros and cons of loan consolidation and refinancing?  Some thoughts below:

Pros:
1)  Lower payments at lower interest rates that are usually locked in.  Can't beat that with a stick!
2)  Convince.  You can take multiple loans and put them into one monthly payment.
3)  If you can afford to pay more than your minimum payment, you can potentially save more money over the life of a loan.

Cons:
1)  Frequently, though you may make smaller payments, you extend the life of your loan.  Given compounding interest, you will ultimately wind up paying more.
2)  The flip side of locking in an interest rate: if the interest rates drop, you are stuck at a higher rate, and there is usually nothing you can do about it.
3)  With many consolidations, you are locked in, meaning that you cannot change the rate or payment later.  Thus, you only really get one bite at the apple.
4)  Some loans (like college loans) will force you to start paying right away (removing a deferment period) and you'll lose other possible benefits (like future interest rate deductions, other deferment options, etc).

No comments: