A debt consolidation loan only makes sense if it’s better for you financially than not getting a debt consolidation loan. For example, a bad credit debt consolidation loan is a great idea if it will result in a lower monthly payment, at a lower interest rate. However, if you have bad credit, it is possible that you will end up with a loan that’s more expensive than what you were paying before you consolidated.
It is not uncommon for a finance company or other lender to convince you to take all of your credit cards, at an 18% interest rate, and consolidate them into one debt consolidation loan at a 30% interest rate! Obviously that doesn’t make sense, but people do it all the time. Why? Because they make the classic debt consolidation loan mistake of not crunching the numbers.
If you are currently making minimum payments of $500 per month on all of your credit cards each month, would a debt consolidation loan where you only pay $300 per month be a good deal? It sounds like it, because you are saving $200 per month. However, if you keep paying $500 per month your credit cards will be paid off in four years, but you just signed up for a ten year debt consolidation loan. Your monthly payment is less, but due to a high interest rate you are paying for a much longer period of time, which means you are paying a lot more money!
Avoid this mistake: crunch the numbers so that you understand the total amount you are paying, to make sure your debt consolidation loan is a good deal. An even bigger mistake is not consolidating all of your debts, and we will discuss that in our next article.
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