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Things You Should Know About Consolidating Several Smaller Loans into a Refinance Loan


Today, I want to talk to you about loan consolidations.

No. 1 Thinking Free unsplash

If you are reading this, you are probably wondering if this is a good time to consolidate your loans.

You may also be speculating on how quickly you should contact a lender about consolidating your student loan or loans now that the Supreme Court ruled against the president’s loan forgiveness plan and the Covid-19 student loan forbearance program is ending.

There are times when consolidation is your best alternative. However, that is not always the case.

Agreeing to a consolidation loan before you have done your homework is never a good idea.



No. 2 Homework Free Pixabay

If you are already committed to paying back loan proceeds, you do not want to end up paying more money out over a longer period if you can possibly avoid it. A good rule of thumb to remember is that any time you extend payments into a longer term, you are also paying out more money in interest, often even with a smaller interest rate.



No. 3 Home Free unsplash

For example, let us say that you are going to refinance your home mortgage. You have 15 years left on your 30-year mortgage. Your current interest rate is 9%. You discover you can refinance your current mortgage for 5.9%. (To see why a lower interest rate may not be a good deal – read/watch this blog) You will find the link in the YouTube description and the blog at my website.


In this example, we will say that you also have these additional loans that you are considering consolidating:


Description           Balance owed              payment          % rate

Credit card #1       $1500                           $99                  15.09%

Credit card #2       $2700                           $149                14.75%

Student loan         $7800                           $209                   4.45%

Car loan                $18,000                        $250                   6.16%




No. 4 Closer Look Free unsplash

It may seem good to lump all these debts together into your mortgage refinance loan, but why don’t we take a closer look at this particular example.


Using a loan calculator, we have calculated the length of time before each of these loans would be paid in full.


     Item                             # Payments left         # years to payoff             Interest amount 

  Credit card #1                     17                              1.4                                         $175

  Credit card #2                     21                              1.8                                         $373

  Student loan                       41                               3.4                                        $611

  Car loan                               91                              7.6                                        $4,529



Without changing a thing, you can clearly see that the example shows that all these smaller loans will be paid in far less than 15 years. Do you really want to stretch out these payments over 15 years?


Yes, you will be paying interest. You already knew this. When you take out a loan, you will pay more interest each month in the beginning. Then, as you reduce the balance you owe, the interest portion of the payments gets smaller and more of the payment goes toward reducing the principal of your loan. (The original amount you borrowed).


In the case of these smaller loans, you’ve likely been paying on them for a while, meaning you are now paying less interest and more money is going toward the principal of these loans. Is it really going to make good sense to start over again?


No. 5 Wrap Free unsplash

Something is going to happen when you wrap your smaller loan amounts into a home refinance loan. You are paying out more money in interest than you should. Your monthly payment will be higher over the entire 15 years (because you have borrowed more money to cover these smaller loan balances). Nothing will be paid off until the whole loan is repaid.


You could also think of it this way.


Instead of being done paying these loans off in 1.4, 1.8, 3.4, and 7.6 years respectively, you are paying on all of them for the whole15 years!


Is there something you could have done instead?


No.6 Pixabay Free


You could pay off that first credit card balance in 1.4 years. Then, take that amount you used to pay and add it to the 2nd credit card balance. With that additional payment, you will pay down that second credit card balance at a faster rate because the whole additional amount is going to pay down the principal.


With 2 credit card payments paid off, you are well on your way to knocking down that student loan quickly.


No. 7 Car Free unsplash

What do you suppose happens when you take 3 monthly payments and add it to what you were paying for your car?


Words can trick you sometimes. But you are smart. Don’t be needlessly swayed into thinking that life will be so much better if you add your smaller loan payments into your refinance loan. Talk to your CPA or other financial professional to see what choice is best for you.


Another thing to consider is that people mistakenly believe that they are “free” once their small loans are consolidated. What do you suppose happens next? Does it surprise you that many people start charging again like they have no credit card debt at all?



No. 8 Spiral Free unsplash

Consolidation rarely, if ever, solves a person’s overspending or misguided spending. Many times, consolidation gives people a false sense of security by masking the problem that caused these loans in the first place. Get out of the debt spiral. Pay your loans off as quickly as you can and STAY OUT OF DEBT!




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The blog I mentioned you may want to read:


"Why a Low Interest Rate May Not Be a Good Deal"


https://www.BudgetingEssentials > Dan's Money Help Blog > Scroll down to find this blog!

5 Things to Know About Crushing Your Money Woes
Why a Low Interest Rate May Not Be a Good Deal
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