Before you get a debt consolidation loan, do the math. One of the most common mistakes people make when getting a debt consolidation loan is that they don’t do the math to determine what they will be paying with their new loan.
Here’s a common example. You owe balances on five different credit cards, and you are paying on average 19% interest on each of them. You have five different payments each month, and it’s difficult to manage all of the payments. You sometimes forget to make a payment, and you sometimes take cash advances from one credit card to pay the other. You decide to get a debt consolidation loan so that you only have one monthly payment.
The bank turns you down due to the level of your debts, so you go to a finance company, and they agree to give you the loan. They have a great sales pitch: “Can you afford a payment of $300 per month?” You say “great, I can do that”, because you are now paying $600 per month towards your credit cards in an effort to pay them off. It sounds like a great deal.
Not so fast. Do the math. With the interest and service charges and hidden fees, you may end up paying that $300 per month for the next ten years, which is a lot more than you would pay if you simply kept paying what you are paying now.
Some finance companies will charge interest rates of 30% and higher. In most cases it doesn’t make sense to replace a 19% credit card with a 30% interest rate finance company loan. Yes, it’s nice to have one monthly payment, but you should not be paying a huge amount for the privilege.
Do the math. Use a debt consolidation loan calculatorto determine the exact cost of borrowing before you sign on the dotted line.
