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 are two useful tools to help you determine if you are doing the right thing by choosing a debt consolidation loan:
- Compare different repayment periods and interest rates. Use our debt repayment calculator to determine what the exact cost of borrowing and paying off your credit card debt will be before you sign on the dotted line.
- Use our debt options calculator to compare the cost of different debt relief options.
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.
Once you compare these results, contact an advisor today – they can review your calculations with you, explain all of your options in detail and help you make the right choice for you.