Debt Consolidation - Do The Math Before Taking Out A Loan

Debt consolidation is the practice of refinancing several financial obligations, such as credit card balances and auto loans, with just one loan. If the interest rate for the loan is lower than the rate for the loans it replaces, the consumer can save a lot of money. Debtors have one affordable monthly bill instead of many, and the new loan's repayment schedule may lower the total monthly outlay for the consumer. These are definite positives, and a lot of people have successfully used such loans to eliminate financial trouble.

It's up to the borrower to ensure that he or she is better off, however. People with financial troubles often have low credit scores, and that can make it difficult to take out loans at favorable rates. If you obtain a consolidation loan at the same or higher rate than the previous loans, there is only one way that your monthly payments can go down, and that is by extending the length of the loan. Lower payments are nice, but if you extend the length of the repayment schedule, you also raise the total amount of interest that you have to pay. It's quite possible that by consolidating debt, you could actually wind up having to pay back more money than you originally owed.

Before rushing to take out a new loan to repay your debts, you need to do the math and see if you will really benefit from adding another loan to your life. If you can lower your monthly payments by getting a lower interest rate, you will possibly be better off. If you are only taking longer to repay, you may end up paying more. It's your responsibility to figure out if you will really save money, and that might be the most critical part of the process. If you don't have good math skills, find someone to help you. The last thing you want to do is make a bad situation worse by taking out a consolidation loan that hurts you instead of helping you.

Charles Essmeier is the owner of Retro Marketing , a firm devoted to affiliate marketing, and YouEndDebt.com, a site that covers credit cards and debt consolidation, identity theft and other financial matters.

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