Whether it's student loans or credit card debt, you may be wondering whether it makes sense to consolidate your loans into one payment, as opposed to making several monthly payments to different lenders. While loan consolidation has its benefits, there are certain drawbacks to consider as well. You might also choose to refinance your loans rather than consolidate, as doing so could be a better move financially.


Loan consolidation versus refinancing

People tend to use the terms "consolidation" and "refinancing" interchangeably, but they're not the same thing. When you consolidate your loans, what you're doing is taking multiple loans and merging them into a single giant loan.

The benefit of consolidating is that it can eliminate the hassle of making multiple payments each month, as well as reduce your chances of missing a payment. After all, if you're writing out five different checks a month, it's easy enough to forget to put one in the mail. But if you're only responsible for a single payment, there's less opportunity for slip-ups.

That said, you probably won't save any money in the long run by consolidating. Typically, when you consolidate your loans, your new interest rate will be the weighted average of your former loans' interest rates. In fact, while consolidating can reduce the total amount you pay each month, it can also extend the life of your loan so that you wind up paying more money over time.

Refinancing, however, works differently. When you refinance, you'll ideally get to take an existing loan and swap out its current interest rate for a lower one. And the lower your interest rate, the less that loan will cost you.

Does it pay to consolidate?

If you're not sure whether loan consolidation is right for you, here's a handy online tool that can help you make the call:


* Calculator is for estimation purposes only, and is not financial planning or advice. As with any tool, it is only as accurate as the assumptions it makes and the data it has, and should not be relied on as a substitute for a financial advisor or a tax professional.

This calculator can help you figure out your savings by inputting your current debts and seeing what your monthly payments might look like if you were to consolidate your loans. You'll also get a rundown of how much interest you'll wind up paying by consolidating your debts.

However, as you'll notice, there are two key factors to consider: your new interest rate and the length of your new loan.

If you were to consolidate your debts and secure an interest rate that's lower than the weighted average of your current loans' interest rates, then it may make sense to go that route -- especially if you manage not to extend your repayment period in the process. But that's more likely to happen with refinancing, not consolidation. Unless you manage to consolidate and refinance your loans, you'll be stuck paying the same interest rate, just in a different form.

There's also the time factor to consider. Even if you do manage to lower your interest rate, your loans could end up costing you more money in the long run if you extend your repayment plan by several years.

Here's a simple example to illustrate this point. Let's say you owe $10,000 in student loans at 5% interest on a 10-year repayment plan, and another $10,000 at 9% interest on a 10-year repayment plan. In this case, your combined monthly payment will be approximately $232, and you'll wind up spending a total of $7,866 over the life of your loans.

Now let's say you're able to consolidate those debts into a single loan at 7% interest with a 15-year repayment period. Though you'll reduce your monthly payment to $180, you'll wind up spending a total of $12,400 in interest over the life of your loan. Even if you're able to refinance your loans at a lower rate -- say, 5% across the board -- if you extend your repayment period from 10 years to 15, you'll wind up spending $8,440 in interest by the time your debt is paid off.

Before you jump to consolidate your loans, be sure to crunch the numbers and see whether doing so will really save you money in the long run. Though the idea of lowering your monthly payments might hold some appeal, you could wind up costing yourself more money by carrying that debt for longer.