Debt Consolidation - Do the Math Before Taking Out a Loan
By Charlie Essmeier | On March 26, 2007 | In Debt-Consolidation | Rated 
While frequently advertised as the perfect financial solution, debt consolidation might or might not help you. You need to consider a number of factors, including the rate of the consolidation loan, the total amount you owe and the number of years you have to repay the debt. Ultimately, it is up to you to decide if you can benefit from a debt consolidation plan, because the consolidation companies will always say that it will help.
Consolidating debt is the process of replacing several financial obligations, including credit card balances and car loans, with one affordable loan. Borrowers only have one bill to pay each month as opposed to many, and the new loan's repayment schedule may reduce the monthly payment for the consumer. If the rate for the consolidation loan is lower than the rate for the loans it replaces, the consumer can save money. These are definite benefits, and many people have successfully used debt consolidation loans to resolve financial trouble.
It's up to the consumer to ensure that he or she is better off, however. People with problem debt often have poor FICO, or credit scores, and that can make it hard to borrow money at favorable interest rates. If you take out a new loan at the same rate or even a higher one than the previous loans, there is only one way that your monthly payments can drop, and that is by extending the length of the loan. Lower monthly payments are good, but if you extend the repayment schedule, you also raise the total amount of interest that you have to pay. It's possible that by consolidating debt, you could actually wind up having to pay back more money than you originally owed.
Before leaping to acquire new financing to pay off your old bills, you need to look at the numbers and see if you will actually benefit from adding another loan to your life. If you can lower your payments by lowering your interest rate, you will probably benefit. If you are merely taking a longer time to repay, you may pay more in the end. It's up to you to decide if you will actually save, and that may be the most important part of the process. If you aren't good with math, find someone to help you. The last thing you want to do is make a bad problem worse by applying for a loan that hurts rather than help you.
©Copyright 2007 by Retro Marketing. Charles Essmeier is the owner of Retro Marketing , a firm devoted to informational Websites, including MendYourDebt.com, a site about debt consolidation and financial scams, credit counseling, payday loans and personal bankruptcy.
Consolidating debt is the process of replacing several financial obligations, including credit card balances and car loans, with one affordable loan. Borrowers only have one bill to pay each month as opposed to many, and the new loan's repayment schedule may reduce the monthly payment for the consumer. If the rate for the consolidation loan is lower than the rate for the loans it replaces, the consumer can save money. These are definite benefits, and many people have successfully used debt consolidation loans to resolve financial trouble.
It's up to the consumer to ensure that he or she is better off, however. People with problem debt often have poor FICO, or credit scores, and that can make it hard to borrow money at favorable interest rates. If you take out a new loan at the same rate or even a higher one than the previous loans, there is only one way that your monthly payments can drop, and that is by extending the length of the loan. Lower monthly payments are good, but if you extend the repayment schedule, you also raise the total amount of interest that you have to pay. It's possible that by consolidating debt, you could actually wind up having to pay back more money than you originally owed.
Before leaping to acquire new financing to pay off your old bills, you need to look at the numbers and see if you will actually benefit from adding another loan to your life. If you can lower your payments by lowering your interest rate, you will probably benefit. If you are merely taking a longer time to repay, you may pay more in the end. It's up to you to decide if you will actually save, and that may be the most important part of the process. If you aren't good with math, find someone to help you. The last thing you want to do is make a bad problem worse by applying for a loan that hurts rather than help you.
©Copyright 2007 by Retro Marketing. Charles Essmeier is the owner of Retro Marketing , a firm devoted to informational Websites, including MendYourDebt.com, a site about debt consolidation and financial scams, credit counseling, payday loans and personal bankruptcy.