Planning for Debt Consolidation

Don't just jump into a debt consolidation deal because you owe too much. The loan may save you a bit now but cost you more later.

Millions of people owe more money than they should.  The amount of money held by Americans isn't really surprising; no one saves money anymore.  A great deal of the staggering debt in this country is tied up in credit card balances.  Credit card debt is especially expensive, as the rates of interest charged on account balances are much higher than for other varieties of debt.  One often-suggested solution to the problem of having too much or too many debts is to consolidate them.  Is consolidation of debt a wise idea?  Is it the cheap solution that all of the companies that promote it really suggest?

Consolidation of your debt, on its surface, appears to be a wise move.  The average borrower has nearly ten thousand dollars worth of debt, but that debt is often shared among a number of different charge cards.  Each card has its own due date, interest rate and minimum monthly payment.  Each and every month, the consumer must write checks to every one of his or her lenders or creditors.  Debt consolidation organizations ease this process by providing a single loan for an amount sufficient to cover the balances of all of the debtor's outstanding debts.  The debtor then needs to write only one check each month instead of many.  If the debt consolidation loan is collateral-backed, as with a home equity loan or line of credit, the interest rate will be much lower than the rates charged by the loans the new loan replaces.  As such, the consumer can frequently pay less money each month than he was paying previously.

Sometimes, consolidating debt seems right.  Each borrower should carefully look over the figures involved before giving in to pressure from a debt consolidation company.  Of course, replacing several high-interest loans with a single, low-interest loan is appealing, but that doesn't tell the entire story. The real question is "How much will I repay in total?"  A lot of firms promote reduced payments, but those lower monthly payments are frequently achieved by extending the duration of the loan.  If you have credit card balances that you might be able to repay in five years, and you replace them with a home loan with a twenty-five year life, you might actually end up repaying more money in the end, even with a lower interest rate. 

From time to time, what appears to be a great idea is not a good idea upon closer examination.  If you aren't sure whether or not a debt consolidation loan is ideal for you, talk this over with a professional financial advisor.

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