Prepayment penalties and origination fees may also eat into the savings you obtain from a lower debt consolidation loan interest rate. Many lenders will charge loan initiation fees of 1% to 5% of the requested loan amount, which can reduce or eliminate the savings gained from your loan consolidation.
In addition, certain lenders may charge prepayment penalties, which penalize borrowers for attempting to pay off their loans in advance. This has the same negative impact as a hefty initiation fee. Before undertaking any kind of borrowing, be sure to have a clear understanding of all of the fees the lender charges to avoid any surprises. You may find that any short-term savings from loan consolidation might be diluted or eliminated by subsequent fees.