Is Consolidation an Inflation Buster? | 03.25.10

Posted in Consolidation, Loan Consolidation By Evan Jacobs

What is the first rule of finance? Money is worth more to you now than it ever will be to you in the future. This is true in a strictly logical sense and in an emotional sense; don’t you feel calmer, less stressed out if you know you have more money in the bank… just in case? Or perhaps you have a mortgage and you’re paying for both a new house/apartment AND a student loan… wouldn’t having some extra money available to you each month be useful?

There are a lot of tangible benefits to a loan consolidation, including:

  • Lower monthly payments
  • Reducing many bills to one
  • Improving your credit score (oh yes, it’s true.)

But beyond these, there are some simple economics in play too. Although you are effectively lengthening your loan and paying more interest in the long term, you are freeing up more of today’s dollars in your wallet that can be put to better use than paying current (and future) interest.

Some ideas for the extra money:

1) Have you started a retirement account for yourself yet like a 401k or IRA? The sooner you make one and start making contributions, the more it will grow. In addition, for most IRAs, the money you contribute to it is tax-free. An example of the power of an IRA its this:

If you invest $50 each month from age 22 on into a Roth IRA, and retire at 60… you will have saved over $140,000. If you wait until 65 to retire, you make over $213,000. Just think of the possibilities… and you’re only stashing away $50 a month.

2) Save for a down payment. The chances are pretty good that you will want something in the next 10 years or so that requires a down payment: a house, condo, car… maybe saving up for a wedding? The more money you are able to put down when you are buying real estate, the more generous the banks get with their offerings to you (along with a high FICO score.)

3) Build an income buffer. The general rule of thumb for responsible personal finance is to always keep between 4-6 months worth of rent, bills, etc. put away just in case. Although this isn’t feasible for most people starting out, the savings from consolidating student loans can help make this possible. If you choose to make an account for this, choose a high-yield CD so you make plenty of interest on the money without risk.

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7 Responses to “Is Consolidation an Inflation Buster?”

  1. Lauren says on March 26, 2010 at 4:06 pm:

    Making extra principal-only payments, when possible, can also help combat compound interest on loans.

    Reply To This Comment
  2. maira says on March 26, 2010 at 12:11 am:

    thanks for the information but i dont think i will get loan only if i really needed

    Reply To This Comment
  3. bschleifer says on March 25, 2010 at 1:57 pm:

    How does this affect your credit score?

    Reply To This Comment
    • Evan Jacobs says on March 25, 2010 at 2:36 pm:

      The way consolidation works is it pays off all of your previous loans and creates a new master one. So on your record, it will show that you paid all your previous loans in full and this actually boosts your credit.

      Reply To This Comment
      • crystal says on March 27, 2010 at 9:54 am:

        thank you, I was actually wondering that myself, and that answer was very nice!

      • Trey says on April 5, 2010 at 12:53 am:

        Yeah, and then when you can't pay off the consolidated loan, your credit score plummets. "Although you are effectively lengthening your loan and paying more interest in the long term" this proves that you are paying more money. If you just pay off your loans, then you will have a lot of extra money to put away for retirement. If you are paying more long-term, that much less will go into retirement.

  4. Allen Taylor says on March 25, 2010 at 9:01 am:

    Nice writing. You are on my RSS reader now so I can read more from you down the road.

    Allen Taylor

    Reply To This Comment

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