Most people have heard of loan consolidation because of the Federal programs that are available and often believe that private loan consolidation works the same way, which is, unfortunately, not the case. In the Federal program, virtually everyone is eligible because their old Federal loans and the new Federal consolidation loan do not require a credit score for approval. Private consolidation loans are offered by banks and credit unions (not the Federal government) and are credit-based and generally require strong credit to be obtained. Most people take advantage of the Federal programs because they are having trouble managing their debt burden and a lower payment will help. If you also have private loan debt and you're struggling to make the payments and/or have weak credit, then it's unlikely you'll qualify for private consolidation.
Here's how it works: a private consolidation loan is a single, new loan issued by the bank or credit union that pays off all (or some) of your existing private loans. In most cases your old loans were probably held by other banks - not the one you're already with. If you are approved, the new lender will pay off the old loans on your behalf and roll that obligation into a single, new loan. Rates on the loan will vary depending on your credit history, credit score and debt to income ratio, among other factors. Some programs offer fixed and variable rate programs. Remember, variable rates are tied to an index such as the Prime rate or LIBOR, so in the future the rates could be higher or lower depending on the economy.
Who should consolidate? The programs are best for people with strong credit and large loan balances who desire a lower monthly payment as well as people who have loans from multiple providers (but who still have strong credit). Keep in mind that a new loan with longer repayment means more interest accrues and the overall cost of the loan will be higher. If, however, you plan to pay it off sooner than the term of the loan and want a lower payment in the meantime, it might make sense to consolidate.
Who should not consolidate? If you are someone who is managing the repayment process without any real challenges and your loans are all held by one lender, private consolidation probably does not make sense. Why? A new loan will likely be paid over 15-25 years and that means that the interest you'll pay will likely be more than if you had just managed the payments you have on existing loans.Who should not even try to consolidate? People with weak or poor credit, people with low income compared to the debt they hold, people who have had trouble paying Federal or private loans in the past.