Debt Consolidation Could Hurt You In Long Run

Consolidation of your debt, on its surface, seems like a smart move. The average borrower has nearly $10,000 worth of debt, but that debt is often spread among a number of different charge cards. Each card has its own due date, interest rate and minimum monthly payment. Every month, the debtor must write checks to every one of his or her lenders or creditors. Debt consolidation agencies ease this process by providing a new loan for an amount sufficient to cover the balances of all of the borrower's outstanding debts. The consumer then needs to write only one personal check each month instead of several. If the loan is collateral-backed, as with a home equity loan, the rate of interest will be much lower than the interest rates charged by the credit card loans the new loan replaces. As such, the borrower can often pay less money each and every month than he or she was paying before.

In some cases, consolidating debt seems sensible. Each debtor should carefully look over the details involved before responding to pressure from a debt consolidation company. Sure, replacing a number of loans with one affordable, low-interest loan is appealing, but that does not tell the complete story. The real question is "How much will I pay back in altogether?" A lot of lenders promote reduced monthly payments, but those lower monthly payments are often achieved by extending the life of the loan. If you have credit card balances that you could be able to repay in five years, and you exchange them for a home loan with a 25 year life, you may actually wind up repaying more money in the end, even with a lower interest rate.

Sometimes, what seems to be a great idea is not a good idea upon closer examination. If you are not sure if a debt consolidation loan is right for you, consult with an experienced financial counselor.

Charles Essmeier is the owner of Retro Marketing, a firm devoted to informational Websites, including.End-Your-Debt.com, a site about debt consolidation, personal bankruptcy, establishing credit and credit counseling.

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