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Debt Consolidation

Debt consolidation is a term that is often used for a variety of issues. Some use the term to describe credit counseling where you might make one payment to a credit counselor and they, in turn, divide it up and send payments to creditors.

Debt consolidation is also used to describe getting a loan to pay off old debts and then making one payment to the new lender.

But debt consolidation is sometimes used to describe a short-term payday loan. Although it is a new loan, the repayment period may be measured in weeks or a few months. If you don’t repay the loan by the short due date you can pay substantially more than you are paying now.

Debt consolidation may also be thought of as a balance transfer to a new credit card. While technically a new lender, these offers typically come with low or no interest rate promotional periods which will roll into high-interest-rate when the introductory period expires. In the long run, these offers can be very expensive if you don’t pay off the entire balance before the 0 percent rate period ends. Cleverly, the introductory periods with no interest also require a very small minimum payment to help make you miss the low-cost payoff.

Regardless of which debt consolidation approach you use it can be fairly easy to tell what solution is right for you. One quick trick is to use my online Get Out of Debt Calculator to compare options.

Contemplating debt consolidation.

Debt Consolidation is Determined by Math

You might fall into the debt consolidation trap where your monthly payment might be lower than what you are paying now. Typically that’s simply because the new debt consolidation loan is for a longer period of time. While the monthly payment may be lower, the long repayment period can significantly increase the amount you are paying back and making the cost of the loan substantially more expensive.

More concentration on the math can help you spot a debt consolidation loan offer that is more expensive because it has a higher interest rate. Interest rates are determined by your risk as a borrower. The more debt you are carrying or your spotty payment record can drive up the interest rate you may be charged for a debt consolidation loan to above 30 percent.

Ironically, the people with the best credit scores who will pay the least amount of interest are those who are not in debt trouble and are looking the least for such a loan.

Debt Consolidation Can Be a Valid Strategy

If the math makes sense for you and you’ve found a debt consolidation loan offer that makes sense and adds up to a better deal, consolidating your debt into a lower overall cost loan can help you to come out ahead. In my experience, these lower cost loans are available to people who took out expensive loans, rebuilt their credit score, and then became candidates to refinance older debt consolidation loans into a new lower-cost loan.

These loans are typically available for people who are not in the midst of a financial mess and who have exceptionally good credit.