Since the beginning of debt, people have sought easy ways to make the debt go away. The very first tool, besides debt forgiveness, was probably the debt consolidation loan.
Combining all your debts into one new loan can feel like you are making progress. But are you?
A debt consolidation loan does what it says it will do. The loan will allow you to pay off other bills and leave you with one payment to make on a regular basis.
Can a Debt Consolidation Loan Make Cents?
Your new consolidation debt may save you money and make cents. It just might not make sense.
To determine if a debt consolidation loan is going to be a smart financial move you must figure out what the terms of the loan are. The three critical factors to check are:
Interest Rate – Is the interest rate on the new loan going to be more than the interest rate you are paying now? When looking at your current debts keep a close eye on the debts you owe the most on and the interest rate you are being charged. The interest rate is an indicator of which loans are the most costly for you to repay. The higher the interest rate, the higher the cost of the borrowing.
Length of the Loan – A debt that is repaid in smaller monthly payments but over a more extended period will cost you more overall.
Secured or Unsecured – An unsecured loan to pay off old debt is always preferential if you are having money troubles. This type of loan could be eliminated through bankruptcy if you had future money problems. If you take out a debt consolidation loan by borrowing from the equity in your home or car, you could lose them if you can’t make the payments.
A Smart Loan is More Math Than Magic
Figuring out if the consolidation approach is a smarter thing to do requires you to stop thinking emotionally. Getting a consolidation loan may make you feel like a load of stress has been removed from your shoulders but that happy feeling passes quickly.
You should ask yourself if the goal of hunting down this loan is to do better financially or just to make one monthly payment rather than many. If you wish to make one monthly payment than got get any debt consolidation loan. But if you want to make a smart financial choice then take your time, understand the terms of the loan, and you’ll feel confident.
The big gotcha in unsecured debt consolidation loans is the people who need the loan the most generally have the least spectacular credit. They then pay the highest interest rate because they are a significant credit risk.
You can check to see what your interest rate would be if you click here.