A debt consolidation loan does not reduce your debts, but it can help you save money. If you currently owe $50,000 on five different credit cards, and each credit card carries an interest rate of 19%, you are paying almost $800 per month in interest. If you could get a $50,000 debt consolidation loan from the bank, at an 8% rate of interest, your monthly interest would drop to $333 per month, so you can devote more of your monthly payments to repaying the principal, and less to paying interest.
Consolidation Loan The Full Cost
If all you need is a break on your monthly payments and a debt consolidation loan may be the correct solution for you, right? Not so fast, there are four things to consider:
- First, you need to find a lender that will give you the loan. In the above example you need to borrow $50,000; that’s not easy to do in these days of tight credit. You may need security (such as a house) or you may need a co-signer to qualify for the loan.
- Next you need to ask what the interest rate will be on your new loan. Make sure that the interest rate you will be paying is less that what you are paying now.
- Make sure that the term of your loan is not extended beyond what is reasonable. If you are taking out a second mortgage on your home at a low interest rate then a 15 year amortization might be reasonable. If you are taking out an unsecured debt consolidation loan at a higher rate and only paying minimum payments you could end up in debt for 20, 30 years and even longer. That’s probably not what you are hoping for.
- Can you still afford the payments. If all you are doing is lowering your monthly payments and buying yourself a little time you may not be doing yourself any good for the long term. Make sure your your monthly debt consolidation payments are affordable (and the consolidation loan will be repaid in a reasonable period of time).
Before you sign with any debt consolidation company, be sure you have compared their package with other programs.
Even with a new consolidation loan you are still carrying a lot of debt, so you will need to decide whether or not a loan is the solution to your problems. Use our Debt Options Calculator to compare your repayment options under different debt relief alternatives.
Make sure that you choose the best solution for your situation. Contact an expert today for a free, personal, debt evaluation.